A Look At The Fair Value Of Vistry Group PLC (LON:VTY)

Key Insights

• The projected fair value for Vistry Group is UK£12.38 based on 2 Stage Free Cash Flow to Equity
• Current share price of UK£9.92 suggests Vistry Group is potentially trading close to its fair value
• Our fair value estimate is 29% higher than Vistry Group's analyst price target of UK£9.57

Today we will run through one way of estimating the intrinsic value of Vistry Group PLC (LON:VTY) by taking the forecast future cash flows of the company and discounting them back to today's value. This will be done using the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

See our latest analysis for Vistry Group

The Calculation

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (£, Millions)	UK£346.2m	UK£354.6m	UK£382.0m	UK£327.0m	UK£326.7m	UK£328.0m	UK£330.6m	UK£334.0m	UK£338.1m	UK£342.7m
Growth Rate Estimate Source	Analyst x7	Analyst x6	Analyst x1	Analyst x1	Est @ -0.11%	Est @ 0.42%	Est @ 0.78%	Est @ 1.04%	Est @ 1.22%	Est @ 1.35%
Present Value (£, Millions) Discounted @ 8.9%	UK£318	UK£299	UK£296	UK£232	UK£213	UK£196	UK£182	UK£168	UK£157	UK£146

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = UK£2.2b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (1.6%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 8.9%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = UK£343m× (1 + 1.6%) ÷ (8.9%– 1.6%) = UK£4.8b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= UK£4.8b÷ ( 1 + 8.9%)¹⁰= UK£2.0b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is UK£4.2b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of UK£9.9, the company appears about fair value at a 20% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

The Assumptions

We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Vistry Group as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 8.9%, which is based on a levered beta of 1.331. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

SWOT Analysis for Vistry Group

Looking Ahead:

Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for a company. DCF models are not the be-all and end-all of investment valuation. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For Vistry Group, we've compiled three essential aspects you should assess:

1. Risks: To that end, you should be aware of the 1 warning sign we've spotted with Vistry Group .
2. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for VTY's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
3. Other High Quality Alternatives: Do you like a good all-rounder? 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 updates its DCF calculation for every British stock every day, so if you want to find the intrinsic value of any other stock just search here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.