Estimating The Intrinsic Value Of Moneysupermarket.com Group PLC (LON:MONY)

Key Insights

• The projected fair value for Moneysupermarket.com Group is UK£2.77 based on 2 Stage Free Cash Flow to Equity

• Moneysupermarket.com Group's UK£2.74 share price indicates it is trading at similar levels as its fair value estimate

• Our fair value estimate is 1.3% higher than Moneysupermarket.com Group's analyst price target of UK£2.73

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Moneysupermarket.com Group PLC (LON:MONY) as an investment opportunity by taking the forecast future cash flows of the company and discounting them back to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

View our latest analysis for Moneysupermarket.com Group

Step By Step Through The Calculation

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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) forecast

	2023	2024	2025	2026	2027	2028	2029	2030	2031	2032
Levered FCF (£, Millions)	UK£86.0m	UK£94.7m	UK£109.0m	UK£114.0m	UK£118.0m	UK£121.4m	UK£124.2m	UK£126.6m	UK£128.8m	UK£130.8m
Growth Rate Estimate Source	Analyst x8	Analyst x7	Analyst x5	Est @ 4.57%	Est @ 3.54%	Est @ 2.83%	Est @ 2.32%	Est @ 1.97%	Est @ 1.72%	Est @ 1.55%
Present Value (£, Millions) Discounted @ 8.7%	UK£79.1	UK£80.1	UK£84.8	UK£81.6	UK£77.7	UK£73.5	UK£69.1	UK£64.8	UK£60.7	UK£56.7

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = UK£728m

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 (1.2%) 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 8.7%.

Terminal Value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = UK£131m× (1 + 1.2%) ÷ (8.7%– 1.2%) = UK£1.7b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= UK£1.7b÷ ( 1 + 8.7%)¹⁰= UK£756m

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£1.5b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of UK£2.7, the company appears about fair value at a 0.9% 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

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 Moneysupermarket.com 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 8.7%, which is based on a levered beta of 1.087. 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 Moneysupermarket.com Group

Strength

• Earnings growth over the past year exceeded the industry.

• Debt is not viewed as a risk.

Weakness

• Dividend is low compared to the top 25% of dividend payers in the Interactive Media and Services market.

Opportunity

• Annual earnings are forecast to grow faster than the British market.

• Good value based on P/E ratio and estimated fair value.

Threat

• Dividends are not covered by earnings.

• Revenue is forecast to grow slower than 20% per year.

Looking Ahead:

Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. It's not possible to obtain a foolproof valuation with a DCF model. 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 Moneysupermarket.com Group, we've compiled three additional elements you should explore:

1. Risks: For example, we've discovered 1 warning sign for Moneysupermarket.com Group that you should be aware of before investing here.

2. Future Earnings: How does MONY'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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the LSE 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.

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