Estimating The Fair Value Of Cordel Group Plc (LON:CRDL)

Key Insights

• Cordel Group's estimated fair value is UK£0.043 based on 2 Stage Free Cash Flow to Equity

• Cordel Group's UK£0.037 share price indicates it is trading at similar levels as its fair value estimate

• Cordel Group's peers are currently trading at a premium of 77% on average

Does the March share price for Cordel Group Plc (LON:CRDL) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by projecting its future cash flows and then discounting them to today's 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!

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. 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.

Check out our latest analysis for Cordel Group

The Method

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, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (£, Millions)	-UK£412.0k	UK£142.0k	UK£207.7k	UK£275.9k	UK£340.8k	UK£398.5k	UK£447.7k	UK£488.7k	UK£522.3k	UK£550.1k
Growth Rate Estimate Source	Analyst x1	Analyst x1	Est @ 46.25%	Est @ 32.87%	Est @ 23.50%	Est @ 16.94%	Est @ 12.35%	Est @ 9.14%	Est @ 6.89%	Est @ 5.31%
Present Value (£, Millions) Discounted @ 6.2%	-UK£0.4	UK£0.1	UK£0.2	UK£0.2	UK£0.3	UK£0.3	UK£0.3	UK£0.3	UK£0.3	UK£0.3

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = UK£1.9m

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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 1.6%. We discount the terminal cash flows to today's value at a cost of equity of 6.2%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = UK£550k× (1 + 1.6%) ÷ (6.2%– 1.6%) = UK£12m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= UK£12m÷ ( 1 + 6.2%)¹⁰= UK£6.6m

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£8.5m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of UK£0.04, the company appears about fair value at a 12% 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.

dcf

The 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 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 6.2%, which is based on a levered beta of 1.000. 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

Strength

• Currently debt free.

Weakness

• Shareholders have been diluted in the past year.

Opportunity

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

Threat

• Has less than 3 years of cash runway based on current free cash flow.

Next Steps:

Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. 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. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Cordel Group, we've put together three important factors you should look at:

1. Risks: Take risks, for example - Cordel Group has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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 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. 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.

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.