In this article I am going to calculate the intrinsic value of Restore PLC (AIM:RST) using the discounted cash flows (DCF) model. 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 Restore here.
What’s the value?
I will be using the 2-stage growth model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the initial phase has higher growth rates that plateau over time. To start off, I pulled together the analyst consensus forecast of RST’s levered free cash flow (FCF) over the next five years and discounted these figures at the rate of 8.3%. This resulted in a present value of 5-year cash flow of £119M. Want to know how I arrived at this number? Read our detailed analysis here.
Above is a visual representation of how RST’s top and bottom lines are expected to move going forward, which should give you some color on RST’s outlook. Then, I determine the terminal value, which accounts for all the future cash flows after the five years. I’ve decided 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 £343M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is £463M. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of £4.10, which, compared to the current share price of £5.695, we find that Restore is quite expensive and not available at a discount at this time.
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 RST, I’ve compiled three fundamental aspects 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.