【hot tub trips breaker when jets are turned on】Calculating The Fair Value Of The City Pub Group plc (LON:CPC)
Today I will be providing a simple run through of a valuation method used to estimate the attractiveness of Thehot tub trips breaker when jets are turned on City Pub Group plc (
LON:CPC
) as an investment opportunity by taking the foreast future cash flows of the company and discounting them back to today’s value. This is done using the Discounted Cash Flows (DCF) model. It may sound complicated, but actually it is quite simple! If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the
Simply Wall St analysis model
. If you are reading this and its not January 2019 then I highly recommend you check out the latest calculation for City Pub Group by following the link below.
View our latest analysis for City Pub Group
Crunching the numbers
I use what is known as a 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the first stage is higher growth, and the second stage is a more stable growth phase. To start off with we need to estimate the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. The sum of these cash flows is then discounted to today’s value.
5-year cash flow estimate
2019
2020
2021
2022
2023
Levered FCF (£, Millions)
£3.77
£5.18
£6.11
£7.15
£8.29
Source
Analyst x2
Analyst x2
Est @ 18%, capped from 27.26%
Est @ 17%, capped from 27.26%
Est @ 16%, capped from 27.26%
Present Value Discounted @ 8.28%
£3.49
£4.42
£4.81
£5.20
£5.57
Present Value of 5-year Cash Flow (PVCF)
= UK£23m
After calculating the present value of future cash flows in the intial 5-year period we need to calculate the Terminal Value, which accounts for all the future cash flows beyond the first stage. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 1.4%. We discount this to today’s value at a cost of equity of 8.3%.
Terminal Value (TV)
= FCF
2023
× (1 + g) ÷ (r – g) = UK£8.3m × (1 + 1.4%) ÷ (8.3% – 1.4%) = UK£122m
Present Value of Terminal Value (PVTV)
= TV / (1 + r)
5
= UK£122m ÷ ( 1 + 8.3%)
5
= UK£82m
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 UK£106m. The last step is to then divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) then we use the equivalent number.
This results in an intrinsic value of £1.72
. Relative to the current share price of £1.76, the stock is fair value, maybe slightly overvalued at the time of writing.
Story continues
AIM:CPC Intrinsic Value Export January 1st 19
Important assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don’t agree with my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at City Pub Group as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 8.3%, which is based on a levered beta of 0.800. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
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. For CPC, there are three pertinent factors you should further examine:
Financial Health
: Does CPC have a healthy balance sheet? Take a look at our
free balance sheet analysis with six simple checks
on key factors like leverage and risk.
Future Earnings
: How does CPC’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
.
Other High Quality Alternatives
: Are there other high quality stocks you could be holding instead of CPC? 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 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 past 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. For errors that warrant correction please contact the editor at
.
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