Investors Are Undervaluing Finsbury Food Group Plc (LON:FIF) By 40.28%, Here Is My Intrinsic Value Calculation
How far off is Finsbury Food Group Plc (AIM:FIF) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced 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 December 2017 so be sure check the latest calculation for Finsbury Food Group here.
Is FIF fairly valued?
I will be using the 2-stage growth model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second ‘steady growth’ period. To start off, I pulled together the analyst consensus estimates of FIF’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity of 8.3%. 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 £54.1M. Keen to know how I calculated this value? Take a look at our detailed analysis here.
Above is a visual representation of how FIF’s earnings are expected to move going forward, which should give you some color on FIF’s outlook. Then, I determine the terminal value, which is the business’s cash flow after the first stage. I think it’s suitable to use the 10-year government bond rate of 2.8% as the perpetual 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 £167.2M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is £221.3M. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of £1.73, which, compared to the current share price of £1.035, we find that Finsbury Food Group is quite undervalued at a 40.28% discount to what it is available for right now.
Next Steps:
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 FIF, I’ve compiled three fundamental factors you should further examine:
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.
