In this article I am going to calculate the intrinsic value of EU Supply Plc (AIM:EUSP) using the discounted cash flows (DCF) model. If you want to learn more about this method, the basis for my calculations can be found in detail in the Simply Wall St analysis model. Also note that this article was written in June 2018 so be sure check the latest calculation for EU Supply here.
Is EUSP fairly valued?
I’ve used the 2-stage growth model, which simply means we take in account two stages of company’s growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have perpetual stable growth rate. To start off, I use the analyst consensus estimates of EUSP’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity of 9.02%. When estimates weren’t available, I’ve extrapolated the average annual growth rate over the previous five years, capped at a reasonable level. This resulted in a present value of 5-year cash flow of UK£3.03M. Keen to know how I calculated this value? Read our detailed analysis here.
The graph above shows how EUSP’s earnings are expected to move going forward, which should give you some color on EUSP’s outlook. Next, I determine the terminal value, which accounts for all the future cash flows after the five years. It’s appropriate to use the 10-year government bond rate of 2.8% as the stable growth rate, which is rightly below GDP growth, but more towards the conservative side. After discounting the terminal value back five years, the present value becomes UK£12.24M.
The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is UK£15.27M. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of £0.21, which, compared to the current share price of £0.1375, we find that EU Supply is quite good value at a 35.41% discount to what it is available for right now.
Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For EUSP, there are three fundamental factors you should further examine:
- Financial Health: Does EUSP have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
- Future Earnings: How does EUSP’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
- Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of EUSP? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. Simply Wall St does a DCF calculation for every GB stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.