Is There An Opportunity With Espial Group Inc’s (TSX:ESP) 43.01% Undervaluation?
I am going to run you through how I calculated the intrinsic value of Espial Group Inc (TSX:ESP) using the discounted cash flow (DCF) method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Also note that this article was written in November 2017 so be sure check the latest calculation for Espial Group here.
Is ESP fairly valued?
I’ve used 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. Firstly, I use the analyst consensus estimates of ESP’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity of 8.49%. This resulted in a present value of 5-year cash flow of CA$6M. Keen to understand how I arrived at this number? Take a look at our detailed analysis here.
In the visual above, we see how how ESP’s earnings are expected to move going forward, which should give you some color on ESP’s outlook. Now we need to 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. Discounting the terminal value back five years gives us a present value of CA$102M.
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 CA$108M. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of CA$2.98, which, compared to the current share price of CA$1.7, we find that Espial Group is quite undervalued at a 43.01% discount to what it is available for right now.
Next Steps:
Although the valuation of a company is important, 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 ESP, there are three relevant aspects you should further examine:
PS. Simply Wall St does a DCF calculation for every CA 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.
