Advertisement
Singapore markets closed
  • Straits Times Index

    3,292.69
    +10.64 (+0.32%)
     
  • Nikkei

    38,405.66
    +470.90 (+1.24%)
     
  • Hang Seng

    17,763.03
    +16.12 (+0.09%)
     
  • FTSE 100

    8,144.13
    -2.90 (-0.04%)
     
  • Bitcoin USD

    60,528.16
    -3,419.21 (-5.35%)
     
  • CMC Crypto 200

    1,293.57
    -45.50 (-3.40%)
     
  • S&P 500

    5,035.69
    -80.48 (-1.57%)
     
  • Dow

    37,815.92
    -570.17 (-1.49%)
     
  • Nasdaq

    15,657.82
    -325.26 (-2.04%)
     
  • Gold

    2,301.80
    -1.10 (-0.05%)
     
  • Crude Oil

    81.25
    -0.68 (-0.83%)
     
  • 10-Yr Bond

    4.6860
    +0.0720 (+1.56%)
     
  • FTSE Bursa Malaysia

    1,575.97
    -6.69 (-0.42%)
     
  • Jakarta Composite Index

    7,234.20
    +78.41 (+1.10%)
     
  • PSE Index

    6,700.49
    -69.15 (-1.02%)
     

An Intrinsic Calculation For Ultimate Products Plc (LON:ULTP) Suggests It's 43% Undervalued

Key Insights

  • The projected fair value for Ultimate Products is UK£2.56 based on 2 Stage Free Cash Flow to Equity

  • Current share price of UK£1.45 suggests Ultimate Products is potentially 43% undervalued

  • Analyst price target for ULTP is UK£2.20 which is 14% below our fair value estimate

Today we will run through one way of estimating the intrinsic value of Ultimate Products Plc (LON:ULTP) by taking the expected future cash flows and discounting them to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. It may sound complicated, but actually it is quite simple!

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.

ADVERTISEMENT

View our latest analysis for Ultimate Products

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. To begin with, we have to get estimates of 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£12.7m

UK£13.3m

UK£14.9m

UK£14.2m

UK£13.9m

UK£13.7m

UK£13.6m

UK£13.7m

UK£13.7m

UK£13.9m

Growth Rate Estimate Source

Analyst x3

Analyst x3

Analyst x2

Est @ -4.39%

Est @ -2.58%

Est @ -1.32%

Est @ -0.43%

Est @ 0.19%

Est @ 0.63%

Est @ 0.93%

Present Value (£, Millions) Discounted @ 7.2%

UK£11.9

UK£11.6

UK£12.1

UK£10.8

UK£9.8

UK£9.0

UK£8.4

UK£7.8

UK£7.4

UK£6.9

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = UK£96m

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. 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 7.2%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = UK£14m× (1 + 1.6%) ÷ (7.2%– 1.6%) = UK£253m

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= UK£253m÷ ( 1 + 7.2%)10= UK£126m

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£222m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of UK£1.5, the company appears quite good value at a 43% 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
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. 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 Ultimate Products 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 7.2%, which is based on a levered beta of 1.015. 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 Ultimate Products

Strength

  • Debt is not viewed as a risk.

  • Dividends are covered by earnings and cash flows.

Weakness

  • Earnings growth over the past year underperformed the Retail Distributors industry.

  • Dividend is low compared to the top 25% of dividend payers in the Retail Distributors market.

Opportunity

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

  • Trading below our estimate of fair value by more than 20%.

Threat

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

Looking Ahead:

Valuation is only one side of the coin in terms of building your investment thesis, and it 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. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. 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. Why is the intrinsic value higher than the current share price? For Ultimate Products, we've compiled three further items you should further examine:

  1. Risks: Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Ultimate Products , and understanding these should be part of your investment process.

  2. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for ULTP's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.

  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.