A Look At The Intrinsic Value Of Ten Lifestyle Group Plc (LON:TENG)

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editorial-team@simplywallst.com (Simply Wall St)

Fri, Dec 22, 2023, 1:25 AM 6 min read

Today we will run through one way of estimating the intrinsic value of Ten Lifestyle Group Plc (LON:TENG) by taking the expected future cash flows and discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

View our latest analysis for Ten Lifestyle Group

The Model

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To start off with, we need to estimate 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, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (£, Millions)	UK£1.28m	UK£2.25m	UK£3.06m	UK£3.84m	UK£4.54m	UK£5.14m	UK£5.64m	UK£6.05m	UK£6.39m	UK£6.67m
Growth Rate Estimate Source	Analyst x2	Analyst x2	Est @ 35.76%	Est @ 25.49%	Est @ 18.30%	Est @ 13.26%	Est @ 9.74%	Est @ 7.27%	Est @ 5.55%	Est @ 4.34%
Present Value (£, Millions) Discounted @ 6.9%	UK£1.2	UK£2.0	UK£2.5	UK£2.9	UK£3.2	UK£3.4	UK£3.5	UK£3.5	UK£3.5	UK£3.4

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = UK£29m

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 6.9%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = UK£6.7m× (1 + 1.5%) ÷ (6.9%– 1.5%) = UK£125m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= UK£125m÷ ( 1 + 6.9%)¹⁰= UK£64m

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£93m. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of UK£0.9, the company appears about fair value at a 15% 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 — AIM:TENG Discounted Cash Flow December 22nd 2023

Important Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Ten Lifestyle Group 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 6.9%, which is based on a levered beta of 0.918. 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 Ten Lifestyle Group

Strength

Debt is well covered by cash flow.

Weakness

Interest payments on debt are not well covered.

Opportunity

Current share price is below our estimate of fair value.

Threat

No apparent threats visible for TENG.

Next Steps:

Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize 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. For Ten Lifestyle Group, there are three relevant elements you should explore:

Risks: Case in point, we've spotted 1 warning sign for Ten Lifestyle Group you should be aware of.
Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for TENG's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the AIM every day. If you want to find the calculation for other stocks 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.