Estimating The Fair Value Of Temple & Webster Group Limited (ASX:TPW)

Andy Nguyen

Sun, Jan 13, 2019, 6:08 PM

Does the January share price for Temple & Webster Group Limited (ASX:TPW) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value by estimating the company’s future cash flows and discounting them to their present value. This is done using the Discounted Cash Flows (DCF) model. It may sound complicated, but actually it is quite simple! If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model. Please also note that this article was written in January 2019 so be sure check out the updated calculation by following the link below.

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What’s the value?

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. To start off with we need to estimate the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount the sum of these cash flows to arrive at a present value estimate.

5-year cash flow forecast

	2019	2020	2021	2022	2023
Levered FCF (A$, Millions)	A$1.50	A$2.75	A$4.10	A$7.30	A$8.10
Source	Analyst x2	Analyst x2	Analyst x2	Analyst x1	Analyst x1
Present Value Discounted @ 8.88%	A$1.38	A$2.32	A$3.18	A$5.19	A$5.29

Present Value of 5-year Cash Flow (PVCF)= AU$17m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after the five years. For a number of reasons a very conservative growth rate is used that cannot exceed that of the GDP. In this case I have used the 10-year government bond rate (2.8%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 8.9%.

Terminal Value (TV) = FCF₂₀₂₃ × (1 + g) ÷ (r – g) = AU$8.1m × (1 + 2.8%) ÷ (8.9% – 2.8%) = AU$136m

Present Value of Terminal Value (PVTV) = TV / (1 + r)⁵ = AU$136m ÷ ( 1 + 8.9%)⁵ = AU$89m

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 AU$106m. To get the intrinsic value per share, we divide this by the total number of shares outstanding, or the equivalent number if this is a depositary receipt or ADR. This results in an intrinsic value of A$0.95. Relative to the current share price of A$0.94, the stock is about right, perhaps slightly undervalued at a 0.7% discount to what it is available for right now.

ASX:TPW Intrinsic Value Export January 14th 19

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 my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Temple & Webster Group 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 8.9%, which is based on a levered beta of 0.845. 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:

Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company. For TPW, I’ve compiled three fundamental aspects you should further research:

Financial Health: Does TPW 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 TPW’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 TPW? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. The Simply Wall St app conducts a discounted cash flow for every stock on the ASX every 6 hours. If you want to find the calculation for other stocks 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.

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