In this article I am going to calculate the intrinsic value of Ten Entertainment Group Plc (LSE:TEG) 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. If you are reading this after December 2017 then I highly recommend you check out the latest calculation for Ten Entertainment Group here.
What’s the value?
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. To start off, I use the analyst consensus forecast of TEG’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity of 8.3%. This resulted in a present value of 5-year cash flow of £48.7M. Want to know how I calculated this value? Read our detailed analysis here.
Above is a visual representation of how TEG’s earnings are expected to move going forward, which should give you an idea of TEG’s outlook. Then, I calculate 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 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 £135.1M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is £183.8M. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of £2.83, which, compared to the current share price of £2.06, we see that Ten Entertainment Group is about right, perhaps slightly undervalued at a 27.13% 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 TEG, there are three pertinent factors you should further research:
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the LSE every 6 hours. If you want to find the calculation for other stocks 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.