Calculating The Fair Value Of Silly Monks Entertainment Limited (NSE:SILLYMONKS)

Key Insights

• The projected fair value for Silly Monks Entertainment is ₹12.96 based on 2 Stage Free Cash Flow to Equity
• Silly Monks Entertainment's ₹15.00 share price indicates it is trading at similar levels as its fair value estimate
• When compared to theindustry average discount of -340%, Silly Monks Entertainment's competitors seem to be trading at a greater premium to fair value

In this article we are going to estimate the intrinsic value of Silly Monks Entertainment Limited (NSE:SILLYMONKS) by projecting its future cash flows and then discounting them to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. 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 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 Silly Monks Entertainment

Step By Step Through 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. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last 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, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (₹, Millions)	₹9.82m	₹11.0m	₹12.1m	₹13.3m	₹14.4m	₹15.5m	₹16.7m	₹17.9m	₹19.2m	₹20.6m
Growth Rate Estimate Source	Est @ 14.17%	Est @ 11.93%	Est @ 10.37%	Est @ 9.27%	Est @ 8.50%	Est @ 7.96%	Est @ 7.59%	Est @ 7.32%	Est @ 7.14%	Est @ 7.01%
Present Value (₹, Millions) Discounted @ 15%	₹8.5	₹8.3	₹8.0	₹7.5	₹7.1	₹6.7	₹6.2	₹5.8	₹5.4	₹5.0

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₹69m

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. 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 (6.7%) 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 15%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = ₹21m× (1 + 6.7%) ÷ (15%– 6.7%) = ₹261m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ₹261m÷ ( 1 + 15%)¹⁰= ₹64m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₹132m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of ₹15.0, the company appears around fair value at the time of writing. 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.

The 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 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 Silly Monks Entertainment 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 15%, which is based on a levered beta of 1.078. 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 Silly Monks Entertainment

Moving On:

Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. 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 Silly Monks Entertainment, we've put together three additional aspects you should consider:

1. Risks: As an example, we've found 3 warning signs for Silly Monks Entertainment (2 are a bit unpleasant!) that you need to consider before investing here.
2. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
3. Other Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NSEI 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.