-
The expected real value for software circle is UK £ 0.22 based on 2 -phase free cash flow to equity
-
The UK £ 0.23 stock price of Software Circle indicates that it is traded at comparable levels as the estimate of the real value
-
Software Circle colleagues seem to act at a lower premium to real value based on the industrial average of -0.7%
Today we will go through a way to estimate the intrinsic value of Software Circle PLC (LON: SFT) by estimating the future cash flows of the company and limiting them to their current value. A way to achieve this is by using the model (Discounted Cash Flow) model (DCF). Do not be put off by the jargon, the math behind it is actually fairly simple.
We generally believe that the value of a company is the present value of all the money it will generate in the future. However, a DCF is only one valuation statistics among many, and it is not without mistakes. If you still have a few burning questions about this kind of rating, then simply view the Wall ST analysis model.
This technology could replace computers: discover that the 20 shares work to realize Kwantum Computing.
We are going to use a two-stage DCF model that, as the name states, takes into account two growth phases. The first phase is generally a higher growth period that is on its way to the terminal value, laid down in the second ‘steady growth’ period. To start with, we must estimate cash flows for the next ten years. Since there are no analyst estimates of the free cash flow available for us, we have the previous free cash flow (FCF) extrapolates the last reported value of the company. We assume that companies with shrinking free cash flow will slow down their contraction, and that companies with a growing free cash flow will see their growth slowly during this period. We do this to indicate that growth tends to slow down more in the early years than in later years.
In general, we assume that a dollar is more valuable today than a dollar in the future, and so the sum of these future cash flows is subsequently discussed by the value of today:
|
2026 |
2027 |
2028 |
2029 |
2030 |
2031 |
2032 |
2033 |
2034 |
2035 |
|
|
Delivered FCF (£, millions) |
Uk £ 2.87 million |
Uk £ 3.27 million |
Uk £ 3.62 million |
Uk £ 3.92 million |
Uk £ 4.17 million |
Uk £ 4.40 million |
Uk £ 4.60 million |
Uk £ 4.79 million |
Uk £ 4.96 million |
UK £ 5.13 million |
|
Growth rate estimate source |
Is @ 18.66% |
Is @ 13.88% |
Is @ 10.54% |
Is @ 8.20% |
Is @ 6.56% |
Is @ 5.42% |
Is @ 4.61% |
Is @ 4.05% |
Is @ 3.66% |
Is @ 3.38% |
|
Current value (£, millions) discounted @ 7.2% |
Uk £ 2.7 |
Uk £ 2.8 |
Uk £ 2.9 |
Uk £ 3.0 |
Uk £ 2.9 |
Uk £ 2.9 |
Uk £ 2.8 |
Uk £ 2.7 |
Uk £ 2.7 |
Uk £ 2.6 |
(“Est” = FCF growth speed estimated by simply Wall St)
The current value of 10-year Cash Flow (PVCF) = VK £ 28 million
We must now calculate the terminal value, which takes all future cash flows into account after this ten -year period. For a number of reasons, a very conservative growth rate is used that is no greater than that of the GDP growth of a country. In this case we used the 5-year average of the 10-year return of the government bonds (2.7%) to estimate future growth. In the same way as with the 10-year ‘growth period’, we consider future cash flows to today’s value, with the help of equity of 7.2%.
Terminal value (TV)= FCF2035 × (1 + g) ÷ (R – G) = UK £ 5.1 m × (1 + 2.7%) ÷ (7.2% – 2.7%) = UK £ 118m
Current value of terminal value (PVTV)= TV / (1 + R)10= UK £ 118m ÷ (1 + 7.2%)10= VK £ 59 million
The total value, or stock value, is then the sum of the present value of the future cash flows, which in this case is £ 87 million in the UK. The last step is to then divide the share value through the number of outstanding shares. In comparison with the current share price of the UK £ 0.2, the company appears at the time of writing around the real value. However, do not forget that this is only an estimated appreciation, and like any complex formula – waste in it, waste out.
We would point out that the most important input for a discount with a discount is the disconeration foot and of course the actual cash flows. Part of investing is to come up with your own evaluation of the future performance of a company, so try the calculation itself and check your own assumptions. The DCF also does not take into account the possible cyclicity of an industry, or the future capital requirements of a company, so it does not give a complete picture of the potential performance of a company. Since we look at Software Circle as potential shareholders, the costs of equity are used as the discount rate, instead of the capital costs (or weighted average capital costs, WACC) that make up the debt. In this calculation we used 7.2%, which is based on a leverage beta of 0.874. Beta is a measure of the volatility of a share compared to the market as a whole. We get our beta from the sector average beta from worldwide comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable reach for a stable company.
See our newest analysis for software circle
Power
Weakness
Possibility
Threat
Appreciation is only one side of the coin in terms of building your investment thesis, and it will ideally not be the only analysis that you take a close look at for a company. DCF models are not the all and finite investment rating. Instead, the best use is for a DCF model to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. If a company with a different rate grows, or if the costs of equity or risk -free speed changes considerably, the output can look very different. For Software Circle we have put together three fundamental items that you should look at:
-
Financial health: Does SFT have a healthy balance? View our free balance analysis with six simple checks on important factors such as leverage and risk.
-
Other alternatives of high quality: Do you like a good all -rounder? Discover our interactive list of high quality shares to get an idea of what else is, you can be missing!
-
Other top analysts choices: Interested in seeing what the analysts think? View our interactive list of the best share choices of analysts to find out what they believe can have an attractive future prospects!
Ps. The simply Wall ST -app carries out a discount in cash flow rating every day for every stock on the goal. If you want to find the calculation for other shares, just search here.
Feedback on this article? Worried about the content? Contact us With us immediately. As an alternative e-mail editorial team (AT) Easlewallst.com.
This article by Simply Wall St is generally in nature. We comment based on historical data and analyst forecasts that only use an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell shares and does not take your objectives or your financial situation into account. We strive to bring you in the long term -targeted analysis, powered by fundamental data. Note that our analysis may not take into account the latest price -sensitive company announcements or qualitative material. Simply Wall St has no position in the aforementioned stocks.
