A Look At The Intrinsic Value Of Portmeirion Group PLC (LON:PMP)

·6 min read

Key Insights

  • Portmeirion Group's estimated fair value is UK£4.51 based on 2 Stage Free Cash Flow to Equity

  • With UK£3.77 share price, Portmeirion Group appears to be trading close to its estimated fair value

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Portmeirion Group PLC (LON:PMP) as an investment opportunity by taking the forecast future cash flows of the company and discounting them back to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

See our latest analysis for Portmeirion Group

What's The Estimated Valuation?

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) forecast

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

Levered FCF (£, Millions)

UK£3.00m

UK£5.88m

UK£5.91m

UK£5.95m

UK£6.00m

UK£6.05m

UK£6.11m

UK£6.18m

UK£6.24m

UK£6.31m

Growth Rate Estimate Source

Analyst x1

Analyst x2

Analyst x1

Est @ 0.67%

Est @ 0.81%

Est @ 0.91%

Est @ 0.98%

Est @ 1.03%

Est @ 1.07%

Est @ 1.09%

Present Value (£, Millions) Discounted @ 10%

UK£2.7

UK£4.9

UK£4.4

UK£4.1

UK£3.7

UK£3.4

UK£3.1

UK£2.9

UK£2.6

UK£2.4

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = UK£34m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 1.2%. We discount the terminal cash flows to today's value at a cost of equity of 10%.

Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = UK£6.3m× (1 + 1.2%) ÷ (10%– 1.2%) = UK£72m

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= UK£72m÷ ( 1 + 10%)10= UK£28m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is UK£62m. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of UK£3.8, the company appears about fair value at a 16% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

dcf
dcf

The Assumptions

We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Portmeirion Group as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 10%, which is based on a levered beta of 1.272. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

SWOT Analysis for Portmeirion Group

Strength

  • Earnings growth over the past year exceeded the industry.

  • Debt is not viewed as a risk.

Weakness

  • Dividend is low compared to the top 25% of dividend payers in the Consumer Durables market.

Opportunity

  • Annual earnings are forecast to grow faster than the British market.

  • Current share price is below our estimate of fair value.

Threat

  • Paying a dividend but company has no free cash flows.

Next Steps:

Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for a company. It's not possible to obtain a foolproof valuation with a DCF model. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Portmeirion Group, we've compiled three fundamental elements you should further research:

  1. Risks: As an example, we've found 3 warning signs for Portmeirion Group that you need to consider before investing here.

  2. Future Earnings: How does PMP'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.

  3. Other High Quality Alternatives: Do you like a good all-rounder? 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 updates its DCF calculation for every British stock every day, so if you want to find the intrinsic value of any other stock just search here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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