Calculating The Fair Value Of Brave Bison Group plc (LON:BBSN)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Brave Bison Group fair value estimate is UK£0.021

• With UK£0.026 share price, Brave Bison Group appears to be trading close to its estimated fair value

• When compared to theindustry average discount of -298%, Brave Bison Group'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 Brave Bison Group plc (LON:BBSN) by taking the expected future cash flows and discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

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 still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

See our latest analysis for Brave Bison Group

What's The Estimated Valuation?

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, 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) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (£, Millions)	UK£2.50m	UK£2.14m	UK£1.93m	UK£1.81m	UK£1.74m	UK£1.70m	UK£1.68m	UK£1.68m	UK£1.68m	UK£1.70m
Growth Rate Estimate Source	Analyst x1	Est @ -14.50%	Est @ -9.66%	Est @ -6.27%	Est @ -3.89%	Est @ -2.23%	Est @ -1.07%	Est @ -0.26%	Est @ 0.31%	Est @ 0.71%
Present Value (£, Millions) Discounted @ 7.4%	UK£2.3	UK£1.9	UK£1.6	UK£1.4	UK£1.2	UK£1.1	UK£1.0	UK£0.9	UK£0.9	UK£0.8

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = UK£13m

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 7.4%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = UK£1.7m× (1 + 1.6%) ÷ (7.4%– 1.6%) = UK£30m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= UK£30m÷ ( 1 + 7.4%)¹⁰= UK£15m

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£28m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of UK£0.03, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf

Important 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 Brave Bison 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 7.4%, which is based on a levered beta of 1.055. 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 Brave Bison Group

Strength

• Debt is not viewed as a risk.

Weakness

• Earnings declined over the past year.

• Current share price is above our estimate of fair value.

Opportunity

• Annual revenue is forecast to grow faster than the British market.

Threat

• No apparent threats visible for BBSN.

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. 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 Brave Bison Group, we've compiled three further aspects you should consider:

1. Risks: Every company has them, and we've spotted 3 warning signs for Brave Bison Group you should know about.

2. Future Earnings: How does BBSN'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.

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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.