Is There An Opportunity With Cordel Group Plc's (LON:CRDL) 22% Undervaluation?

Key Insights

• The projected fair value for Cordel Group is UK£0.096 based on 2 Stage Free Cash Flow to Equity
• Cordel Group is estimated to be 22% undervalued based on current share price of UK£0.075
• Peers of Cordel Group are currently trading on average at a 27% premium

Today we will run through one way of estimating the intrinsic value of Cordel Group Plc (LON:CRDL) by taking the forecast future cash flows of the company and discounting them back to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

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. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

Check out our latest analysis for Cordel Group

The Model

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.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) estimate

	2023	2024	2025	2026	2027	2028	2029	2030	2031	2032
Levered FCF (£, Millions)	-UK£101.0k	UK£163.0k	UK£295.2k	UK£463.8k	UK£650.8k	UK£836.8k	UK£1.01m	UK£1.15m	UK£1.28m	UK£1.37m
Growth Rate Estimate Source	Analyst x1	Analyst x1	Est @ 81.10%	Est @ 57.12%	Est @ 40.33%	Est @ 28.57%	Est @ 20.35%	Est @ 14.59%	Est @ 10.56%	Est @ 7.73%
Present Value (£, Millions) Discounted @ 7.0%	-UK£0.09	UK£0.1	UK£0.2	UK£0.4	UK£0.5	UK£0.6	UK£0.6	UK£0.7	UK£0.7	UK£0.7

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = UK£4.3m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 7.0%.

Terminal Value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = UK£1.4m× (1 + 1.2%) ÷ (7.0%– 1.2%) = UK£24m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= UK£24m÷ ( 1 + 7.0%)¹⁰= UK£12m

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£16m. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of UK£0.07, the company appears a touch undervalued at a 22% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

Important Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 Cordel 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 7.0%, which is based on a levered beta of 0.992. 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 Cordel Group

Looking Ahead:

Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Why is the intrinsic value higher than the current share price? For Cordel Group, there are three important items you should further research:

1. Risks: We feel that you should assess the 4 warning signs for Cordel Group we've flagged before making an investment in the company.
2. Future Earnings: How does CRDL'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.
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.