Yahoo Finance A Look At The Intrinsic Value Of Crest Nicholson Holdings plc (LON:CRST)
How far off is Crest Nicholson Holdings plc (LON:CRST) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the foreast future cash flows of the company and discounting them back to today's value. This is done using the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.
We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. 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.
View our latest analysis for Crest Nicholson Holdings
Crunching the numbers
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.
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
2020 | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | |
Levered FCF (£, Millions) | UK£35.7m | UK£56.4m | UK£70.2m | UK£61.1m | UK£55.8m | UK£52.6m | UK£50.6m | UK£49.5m | UK£48.9m | UK£48.7m |
Growth Rate Estimate Source | Analyst x4 | Analyst x5 | Analyst x5 | Est @ -12.99% | Est @ -8.72% | Est @ -5.74% | Est @ -3.65% | Est @ -2.19% | Est @ -1.17% | Est @ -0.45% |
Present Value (£, Millions) Discounted @ 9.6% | UK£32.6 | UK£46.9 | UK£53.3 | UK£42.4 | UK£35.3 | UK£30.3 | UK£26.7 | UK£23.8 | UK£21.5 | UK£19.5 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = UK£332m
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 10-year government bond rate of 1.2%. We discount the terminal cash flows to today's value at a cost of equity of 9.6%.
Terminal Value (TV)= FCF2029 × (1 + g) ÷ (r – g) = UK£49m× (1 + 1.2%) ÷ 9.6%– 1.2%) = UK£589m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= UK£589m÷ ( 1 + 9.6%)10= UK£236m
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£568m. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of UK£2.5, 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.
The assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the 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 Crest Nicholson Holdings 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 9.6%, which is based on a levered beta of 1.209. 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.
Next Steps:
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. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/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 Crest Nicholson Holdings, There are three relevant aspects you should further examine:
Risks: You should be aware of the 3 warning signs for Crest Nicholson Holdings (1 doesn't sit too well with us!) we've uncovered before considering an investment in the company.
Future Earnings: How does CRST'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.
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. Simply Wall St updates its DCF calculation for every GB stock every day, so if you want to find the intrinsic value of any other stock just search here.
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This article by Simply Wall St is general in nature. 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. Thank you for reading.
