Yahoo Finance A Look At The Fair Value Of Alpha Financial Markets Consulting plc (LON:AFM)
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Does the February share price for Alpha Financial Markets Consulting plc (LON:AFM) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value by projecting its future cash flows and then discounting them to today’s value. I will use the discounted cash flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Please also note that this article was written in February 2019 so be sure check out the updated calculation by following the link below.
See our latest analysis for Alpha Financial Markets Consulting
Is AFM fairly valued?
I use what is known as a 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the first stage is higher growth, and the second stage is a more stable growth phase. In the first stage we need to estimate the cash flows to the business over the next five years. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount this to its value today and sum up the total to get the present value of these cash flows.
5-year cash flow forecast
2019 | 2020 | 2021 | 2022 | 2023 | |
Levered FCF (£, Millions) | £10.00 | £12.00 | £14.00 | £16.38 | £19.00 |
Source | Analyst x1 | Analyst x1 | Analyst x1 | Est @ 17%, capped from 23.82% | Est @ 16%, capped from 23.82% |
Present Value Discounted @ 8.25% | £9.24 | £10.24 | £11.04 | £11.93 | £12.79 |
Present Value of 5-year Cash Flow (PVCF)= UK£55m
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 an annual growth rate equal to the 10-year government bond rate of 1.2%. We discount this to today’s value at a cost of equity of 8.2%.
Terminal Value (TV) = FCF2023 × (1 + g) ÷ (r – g) = UK£19m × (1 + 1.2%) ÷ (8.2% – 1.2%) = UK£274m
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = UK£274m ÷ ( 1 + 8.2%)5 = UK£184m
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is UK£240m. The last step is to then divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) then we use the equivalent number. This results in an intrinsic value of £2.37. Compared to the current share price of £2.36, the stock is about right, perhaps slightly undervalued at a 0.4% discount to what it is available for right now.
The assumptions
I’d like to point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you don’t agree with my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at Alpha Financial Markets Consulting as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 8.2%, which is based on a levered beta of 0.800. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
Next Steps:
Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company. For AFM, I’ve put together three pertinent factors you should further examine:
Financial Health: Does AFM have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
Future Earnings: How does AFM’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: Are there other high quality stocks you could be holding instead of AFM? 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 does a DCF calculation for every GB stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
