In this article I am going to calculate the intrinsic value of BigBen Interactive (EPA:BIG) by estimating the company’s future cash flows and discounting them to their present 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 September 2018 so be sure check out the updated calculation by following the link below.
Check out our latest analysis for BigBen Interactive
Is BIG 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. The sum of these cash flows is then discounted to today’s value.
5-year cash flow forecast
| 2019 | 2020 | 2021 | 2022 | 2023 | |
| Levered FCF (€, Millions) | €3.53 | €7.16 | €10.78 | €22.56 | €23.43 |
| Source | Analyst x3 | Analyst x5 | Analyst x4 | Analyst x1 | Analyst x1 |
| Present Value Discounted @ 8.94% | €3.24 | €6.03 | €8.33 | €16.02 | €15.27 |
Present Value of 5-year Cash Flow (PVCF)= €48.9m
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 0.8%. We discount this to today’s value at a cost of equity of 8.9%.
Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = €23.4m × (1 + 0.8%) ÷ (8.9% – 0.8%) = €289.2m
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = €289.2m ÷ ( 1 + 8.9%)5 = €188.5m
The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is €237.3m. 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 €12.37. Relative to the current share price of €10.24, the stock is about right, perhaps slightly undervalued at a 17.2% discount to what it is available for right now.