Is Big Technologies PLC (LON:BIG) Worth UK£1.2 Based On Its Intrinsic Value?

Key Insights

• The projected fair value for Big Technologies is UK£1.03 based on 2 Stage Free Cash Flow to Equity

• Current share price of UK£1.24 suggests Big Technologies is potentially 21% overvalued

• Analyst price target for BIG is UK£2.06, which is 101% above our fair value estimate

In this article we are going to estimate the intrinsic value of Big Technologies PLC (LON:BIG) by taking the forecast future cash flows of the company and discounting them back to today's value. This will be done using the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!

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.

Check out our latest analysis for Big Technologies

What's The Estimated Valuation?

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. 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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (£, Millions)	UK£22.9m	UK£20.0m	UK£18.3m	UK£17.3m	UK£16.7m	UK£16.4m	UK£16.2m	UK£16.2m	UK£16.3m	UK£16.4m
Growth Rate Estimate Source	Analyst x4	Analyst x3	Est @ -8.46%	Est @ -5.46%	Est @ -3.37%	Est @ -1.90%	Est @ -0.88%	Est @ -0.16%	Est @ 0.35%	Est @ 0.70%
Present Value (£, Millions) Discounted @ 6.7%	UK£21.5	UK£17.5	UK£15.0	UK£13.3	UK£12.1	UK£11.1	UK£10.3	UK£9.6	UK£9.1	UK£8.5

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = UK£128m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 1.5%. We discount the terminal cash flows to today's value at a cost of equity of 6.7%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = UK£16m× (1 + 1.5%) ÷ (6.7%– 1.5%) = UK£319m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= UK£319m÷ ( 1 + 6.7%)¹⁰= UK£167m

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£295m. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of UK£1.2, the company appears slightly overvalued 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 Big Technologies 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 6.7%, which is based on a levered beta of 0.880. 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 Big Technologies

Strength

• Currently debt free.

Weakness

• Earnings growth over the past year underperformed the Commercial Services industry.

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

Opportunity

• Significant insider buying over the past 3 months.

Threat

• Annual earnings are forecast to decline for the next 4 years.

Moving On:

Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for 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. Can we work out why the company is trading at a premium to intrinsic value? For Big Technologies, we've put together three pertinent items you should consider:

1. Risks: Every company has them, and we've spotted 2 warning signs for Big Technologies (of which 1 is significant!) you should know about.

2. Future Earnings: How does BIG'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. 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.

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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.