- United Kingdom
- Basic Materials
A Look At The Intrinsic Value Of Marshalls plc (LON:MSLH)
Today we will run through one way of estimating the intrinsic value of Marshalls plc (LON:MSLH) by estimating the company's future cash flows and discounting them to their present value. Our analysis will employ the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. 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 Marshalls
Crunching The Numbers
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 start off with, we need to estimate the next ten years of cash flows. 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.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) estimate
|Levered FCF (£, Millions)||UK£64.6m||UK£70.6m||UK£71.0m||UK£71.5m||UK£72.1m||UK£72.8m||UK£73.5m||UK£74.3m||UK£75.1m||UK£75.9m|
|Growth Rate Estimate Source||Analyst x5||Analyst x5||Analyst x1||Est @ 0.71%||Est @ 0.84%||Est @ 0.93%||Est @ 1.00%||Est @ 1.04%||Est @ 1.08%||Est @ 1.10%|
|Present Value (£, Millions) Discounted @ 8.1%||UK£59.7||UK£60.4||UK£56.1||UK£52.3||UK£48.8||UK£45.5||UK£42.5||UK£39.7||UK£37.1||UK£34.7|
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = UK£477m
The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 1.2%. We discount the terminal cash flows to today's value at a cost of equity of 8.1%.
Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = UK£76m× (1 + 1.2%) ÷ (8.1%– 1.2%) = UK£1.1b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= UK£1.1b÷ ( 1 + 8.1%)10= UK£502m
The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is UK£979m. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of UK£3.7, the company appears about fair value at a 5.6% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.
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 Marshalls 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 8.1%, which is based on a levered beta of 1.003. 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 Marshalls
- Debt is well covered by earnings.
- Earnings declined over the past year.
- Dividend is low compared to the top 25% of dividend payers in the Basic Materials market.
- Shareholders have been diluted in the past year.
- Annual earnings are forecast to grow faster than the British market.
- Current share price is below our estimate of fair value.
- Debt is not well covered by operating cash flow.
- Dividends are not covered by cash flow.
- Revenue is forecast to grow slower than 20% per year.
Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. It's not possible to obtain a foolproof valuation with a DCF model. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Marshalls, we've put together three fundamental factors you should assess:
- Risks: For example, we've discovered 3 warning signs for Marshalls that you should be aware of before investing here.
- Future Earnings: How does MSLH'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: 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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the LSE every day. If you want to find the calculation for other stocks 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.
Marshalls plc manufactures and supplies hard landscaping products in the United Kingdom and internationally.
Adequate balance sheet with moderate growth potential.