Advertisement
UK markets close in 2 hours 58 minutes
  • FTSE 100

    7,957.02
    +25.04 (+0.32%)
     
  • FTSE 250

    19,865.63
    +54.97 (+0.28%)
     
  • AIM

    743.14
    +1.03 (+0.14%)
     
  • GBP/EUR

    1.1691
    +0.0022 (+0.19%)
     
  • GBP/USD

    1.2637
    -0.0001 (-0.01%)
     
  • Bitcoin GBP

    56,207.72
    -512.85 (-0.90%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • S&P 500

    5,246.78
    -1.71 (-0.03%)
     
  • DOW

    39,833.17
    +73.09 (+0.18%)
     
  • CRUDE OIL

    82.43
    +1.08 (+1.33%)
     
  • GOLD FUTURES

    2,231.70
    +19.00 (+0.86%)
     
  • NIKKEI 225

    40,168.07
    -594.66 (-1.46%)
     
  • HANG SENG

    16,541.42
    +148.58 (+0.91%)
     
  • DAX

    18,495.31
    +18.22 (+0.10%)
     
  • CAC 40

    8,227.52
    +22.71 (+0.28%)
     

Is Blancco Technology Group plc (LON:BLTG) Expensive For A Reason? A Look At Its Intrinsic Value

Does the June share price for Blancco Technology Group plc (LON:BLTG) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the expected future cash flows and discounting them to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

View our latest analysis for Blancco Technology Group

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. 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.

ADVERTISEMENT

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) forecast

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

Levered FCF (£, Millions)

UK£4.07m

UK£4.53m

UK£5.10m

UK£5.50m

UK£5.81m

UK£6.06m

UK£6.26m

UK£6.42m

UK£6.55m

UK£6.66m

Growth Rate Estimate Source

Analyst x3

Analyst x3

Analyst x3

Est @ 7.82%

Est @ 5.74%

Est @ 4.28%

Est @ 3.26%

Est @ 2.55%

Est @ 2.05%

Est @ 1.7%

Present Value (£, Millions) Discounted @ 5.8%

UK£3.8

UK£4.1

UK£4.3

UK£4.4

UK£4.4

UK£4.3

UK£4.2

UK£4.1

UK£4.0

UK£3.8

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = UK£41m

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 0.9%. We discount the terminal cash flows to today's value at a cost of equity of 5.8%.

Terminal Value (TV)= FCF2031 × (1 + g) ÷ (r – g) = UK£6.7m× (1 + 0.9%) ÷ (5.8%– 0.9%) = UK£137m

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= UK£137m÷ ( 1 + 5.8%)10= UK£78m

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£119m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of UK£2.1, the company appears slightly overvalued at the time of writing. 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.

dcf
dcf

Important 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. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 Blancco Technology 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 5.8%, which is based on a levered beta of 1.011. 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.

Looking Ahead:

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. The DCF model is not a perfect stock valuation tool. 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. What is the reason for the share price exceeding the intrinsic value? For Blancco Technology Group, we've put together three important aspects you should consider:

  1. Risks: We feel that you should assess the 1 warning sign for Blancco Technology Group we've flagged before making an investment in the company.

  2. Future Earnings: How does BLTG'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 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!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the AIM every day. If you want to find the calculation for other stocks just search here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.