Calculating The Fair Value Of Rosenblatt Group Plc (LON:RBGP)

Does the January share price for Rosenblatt Group Plc (LON:RBGP) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value by taking the expected future cash flows and discounting them to today’s value. I will be using the discounted cash flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. 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. Please also note that this article was written in January 2019 so be sure check out the updated calculation by following the link below.

View our latest analysis for Rosenblatt Group

Step by step through the calculation

We are going to use a two-stage DCF 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 begin with we have to get estimates of the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount the sum of these cash flows to arrive at a present value estimate.

5-year cash flow estimate

2019 2020 2021 2022 2023
Levered FCF (£, Millions) £3.60 £4.00 £3.90 £4.00 £4.00
Source Analyst x1 Analyst x1 Analyst x1 Analyst x1 Analyst x1
Present Value Discounted @ 8.28% £3.32 £3.41 £3.07 £2.91 £2.69

Present Value of 5-year Cash Flow (PVCF)= UK£15m

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. For a number of reasons a very conservative growth rate is used that cannot exceed that of the GDP. In this case I have used the 10-year government bond rate (1.4%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 8.3%.

Terminal Value (TV) = FCF2023 × (1 + g) ÷ (r – g) = UK£4.0m × (1 + 1.4%) ÷ (8.3% – 1.4%) = UK£59m

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = UK£59m ÷ ( 1 + 8.3%)5 = UK£40m

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is UK£55m. 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 £0.69. Relative to the current share price of £0.76, the stock is fair value, maybe slightly overvalued at the time of writing.

AIM:RBGP Intrinsic Value Export January 2nd 19
AIM:RBGP Intrinsic Value Export January 2nd 19

Important assumptions

Now 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 my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Rosenblatt 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 RBGP, I’ve put together three fundamental aspects you should look at:

  1. Future Earnings: How does RBGP’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.
  2. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of RBGP? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. The Simply Wall St app conducts a discounted cash flow for every stock on the LON every 6 hours. If you want to find the calculation for other stocks 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 editorial-team@simplywallst.com.