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Backing a discount retail cash generator

  • Pre-tax profit surges 21 per cent to GBP16.4m.
  • Revenue from vaping and sports nutrition segments soar both over 36 per cent.  
  • Earnings accretive small acquisitions.
  • Board eyeing up European expansion opportunities.

Supreme (SUP:203p), a distributor and manufacturer that sells a range of products to discount retailers and supermarkets (B&M, Home Bargains, Poundland, Morrisons and Sainsbury's are all customers) has produced eye-catching maiden results. Buoyed by the success of its vaping brand, 88vape, the market leader in the UK with a 30 per cent market share, group adjusted pre-tax profit surged 21 per cent to GBP16.4m on a third higher revenue of GBP122m in the 12 months to 31 March 2021. The vaping segment increased revenue by 36 per cent to GBP39.5m growth (all organic), of which a maiden nine-month contribution from a contract award from HM Prison & Probation Service accounted for GBP10m of the total and higher margin online sales around GBP6.5m.

More than 1m vapers now use the product regularly, a price point of 100p per 10ml bottle explains exactly why as 88Vape is by far the most affordable e-liquid brand of scale in the UK - the average price is nearer GBP3 per bottle across the industry - thus creating a competitive moat in what remains a high growth sector. It's highly profitable, too, as highlighted by a divisional gross margin of 41 per cent. Analysts at Euromonitor expect the vaping sector to grow at a compound average growth rate of 11 per cent through to 2024, one reason why house brokerage Berenberg believes Supreme's vaping segment can grow gross profit by 12 per cent to GBP18.5m this year to account for half the group total.

If anything, that looks conservative given that Supreme will launch in 400 large Sainsbury's stores in mid-August which will sell the e-liquid in four packs. If successful, a roll-out across the supermarket's chain of 1,413 stores is the next step. Supreme's sports nutrition business has been transformed by last autumn's GBP1m acquisition of GT Divisions, a business that markets and sells a range of low sugar high protein bar snacks under the brand of Battle Bites with production outsourced to a third party.

The snacks are sold at a competitive price of GBP1.25, significantly below that of incumbent producer Grenade bars (GBP1.99 to GBP2.99). Supreme has recently entered the vitamins market, launching its low-cost supplements online brand Sealions this week and has created another brand, Millions & Millions which launches in September with Davina McCall as brand ambassador. The small acquisition of sports nutrition and supplements brands SCI-MX and PRO2GO earlier this month is described by entrepreneurial group chief executive and 56 per cent shareholder Sandy Chadha as "the best acquisition I have ever done." Supreme has purchased GBP1.3m stock from a business that previously was generating GBP8.5m of annual revenue and could bring 70 per cent of manufacturing in-house to improve its profitability.

It's not the only smart deal Supreme has made since IPO in February, the new listing of shares was backed by shrewd fund managers at Slater Investments, Blackrock, Premier Miton, Jupiter and Canacord Genuity. Last month, the group purchased a leading Dublin-based distributor of batteries and lighting products for a maximum consideration of EUR1.8m, or three times annual cash profit, thus giving Supreme access to the Irish market, the ability to cross-sell its other product categories, and creating an export hub to target expansion in Europe. Chadha is looking at further overseas expansion opportunities in the lighting market.

With net debt of GBP7.5m set to be wiped out this year, the group can easily afford to recycle the strong internal cash flow generated from its asset light business model into more earnings accretive acquisitions. Berenberg is pencilling in 10 per cent higher adjusted pre-tax profit and earnings per share (EPS) of GBP18.1m and 13.2p, respectively, in the new financial year, forecasts which look too low in my view, rising to GBP20.9m and 15.2p in 2022/23. Moreover, with the board committing to a 50 per cent pay-out ratio, there are attractive prospective dividend yields of 3.3 per cent and 3.8 per cent on offer, too.

A forward price/earnings (PE) ratio of 13 for the 2022/23 financial year is low in relation to the earnings growth predicted - 12.5 and 15 per cent, respectively, for the next two financial years - and for a company that offers a free cash flow yield of 7.5 per cent. Trading on five-point discount to its peer group PE ratio average, I reiterate the target price of 250p I outlined when I initiated coverage (Alpha Research: 'Tap into a discount cash generator', 27 May 2021). Buy. ?

Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at GBP16.95 each plus postage and packaging of GBP3.25 [UK]. Promotion: Subject to stock availability, both books can be purchased for the promotional price of GBP25 with free postage and packaging.

They include case studies of Simon Thompson's market beating Bargain Share Portfolio companies outlining the investment characteristics that made them successful investments.

Simon also highlights many other investment approaches and stock screens he uses to identify small-cap companies with investment potential.

Details of the content can be viewed on www.ypdbooks.com.

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Coupons & Offers

Backing a discount retail cash generator

  • Pre-tax profit surges 21 per cent to GBP16.4m.
  • Revenue from vaping and sports nutrition segments soar both over 36 per cent.  
  • Earnings accretive small acquisitions.
  • Board eyeing up European expansion opportunities.

Supreme (SUP:203p), a distributor and manufacturer that sells a range of products to discount retailers and supermarkets (B&M, Home Bargains, Poundland, Morrisons and Sainsbury's are all customers) has produced eye-catching maiden results. Buoyed by the success of its vaping brand, 88vape, the market leader in the UK with a 30 per cent market share, group adjusted pre-tax profit surged 21 per cent to GBP16.4m on a third higher revenue of GBP122m in the 12 months to 31 March 2021. The vaping segment increased revenue by 36 per cent to GBP39.5m growth (all organic), of which a maiden nine-month contribution from a contract award from HM Prison & Probation Service accounted for GBP10m of the total and higher margin online sales around GBP6.5m.

More than 1m vapers now use the product regularly, a price point of 100p per 10ml bottle explains exactly why as 88Vape is by far the most affordable e-liquid brand of scale in the UK - the average price is nearer GBP3 per bottle across the industry - thus creating a competitive moat in what remains a high growth sector. It's highly profitable, too, as highlighted by a divisional gross margin of 41 per cent. Analysts at Euromonitor expect the vaping sector to grow at a compound average growth rate of 11 per cent through to 2024, one reason why house brokerage Berenberg believes Supreme's vaping segment can grow gross profit by 12 per cent to GBP18.5m this year to account for half the group total.

If anything, that looks conservative given that Supreme will launch in 400 large Sainsbury's stores in mid-August which will sell the e-liquid in four packs. If successful, a roll-out across the supermarket's chain of 1,413 stores is the next step. Supreme's sports nutrition business has been transformed by last autumn's GBP1m acquisition of GT Divisions, a business that markets and sells a range of low sugar high protein bar snacks under the brand of Battle Bites with production outsourced to a third party.

The snacks are sold at a competitive price of GBP1.25, significantly below that of incumbent producer Grenade bars (GBP1.99 to GBP2.99). Supreme has recently entered the vitamins market, launching its low-cost supplements online brand Sealions this week and has created another brand, Millions & Millions which launches in September with Davina McCall as brand ambassador. The small acquisition of sports nutrition and supplements brands SCI-MX and PRO2GO earlier this month is described by entrepreneurial group chief executive and 56 per cent shareholder Sandy Chadha as "the best acquisition I have ever done." Supreme has purchased GBP1.3m stock from a business that previously was generating GBP8.5m of annual revenue and could bring 70 per cent of manufacturing in-house to improve its profitability.

It's not the only smart deal Supreme has made since IPO in February, the new listing of shares was backed by shrewd fund managers at Slater Investments, Blackrock, Premier Miton, Jupiter and Canacord Genuity. Last month, the group purchased a leading Dublin-based distributor of batteries and lighting products for a maximum consideration of EUR1.8m, or three times annual cash profit, thus giving Supreme access to the Irish market, the ability to cross-sell its other product categories, and creating an export hub to target expansion in Europe. Chadha is looking at further overseas expansion opportunities in the lighting market.

With net debt of GBP7.5m set to be wiped out this year, the group can easily afford to recycle the strong internal cash flow generated from its asset light business model into more earnings accretive acquisitions. Berenberg is pencilling in 10 per cent higher adjusted pre-tax profit and earnings per share (EPS) of GBP18.1m and 13.2p, respectively, in the new financial year, forecasts which look too low in my view, rising to GBP20.9m and 15.2p in 2022/23. Moreover, with the board committing to a 50 per cent pay-out ratio, there are attractive prospective dividend yields of 3.3 per cent and 3.8 per cent on offer, too.

A forward price/earnings (PE) ratio of 13 for the 2022/23 financial year is low in relation to the earnings growth predicted - 12.5 and 15 per cent, respectively, for the next two financial years - and for a company that offers a free cash flow yield of 7.5 per cent. Trading on five-point discount to its peer group PE ratio average, I reiterate the target price of 250p I outlined when I initiated coverage (Alpha Research: 'Tap into a discount cash generator', 27 May 2021). Buy. ?

Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at GBP16.95 each plus postage and packaging of GBP3.25 [UK]. Promotion: Subject to stock availability, both books can be purchased for the promotional price of GBP25 with free postage and packaging.

They include case studies of Simon Thompson's market beating Bargain Share Portfolio companies outlining the investment characteristics that made them successful investments.

Simon also highlights many other investment approaches and stock screens he uses to identify small-cap companies with investment potential.

Details of the content can be viewed on www.ypdbooks.com.

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Coupons & Offers

Councillors agree to £50 voucher scheme for struggling Hertfordshire families during summer holidays

Struggling families with children in Hertfordshire who are facing financial difficulties will be able to claim a GBP50 voucher over the summer holidays. The voucher scheme is part of a GBP2.3m package of measures drawn-up by the county council, which has received an allocation from the government's 'Covid Local Support Grant'. The grant, introduced in December, is designed to help families struggling with food and utility costs during the pandemic.

ProFormance Pathways delivered the camps as part of the HAPpy programme during the Easter breakProFormance Pathways delivered the camps as part of the HAPpy programme during the Easter breakProFormance Pathways delivered the camps as part of the HAPpy programme during the Easter break

And at a meeting of the cabinet on Monday, July 12, councillors agreed how the funds allocated to Hertfordshire should be used.

The lion's share - GBP1.72m - will be used to offer GBP50 vouchers to the 34,000 Hertfordshire families who are eligible for benefit related free school meals, for free two-year-old education and childcare or for 'early years pupil premium'. A further GBP445,000 earmarked for the support adults and GBP194,850 to support families and children will be passed on to other organisations, such as food banks the HertsHelp crisis intervention service. Backing the plans at the meeting, executive member for children, young people and families Cllr Teresa Heritage said: "This funding builds on the GBP4m already received from the government to support the most vulnerable in our society over the Covid period.

"And it is also in addition to the GBP2.79m that we have received from government for food and holiday activity programme this year. "So it is a tremendous amount of support that young people who are in receipt of free school meals can participate in." The county council has previously been allocated GBP2.9m in Covid Winter Support Grant (Dec to March) and GBP1.1m of Covid Local Support Grant (for Apr to June).

And over the summer holidays the county council is also running a 'Holiday Activities and Food' programme - known as HAPpy. HAPpy will offer up to 16 days of activity and childcare - with a meal - for the equivalent of 6200 children and young people. Cllr Heritage told the cabinet there were plans for around 80,000 HAPpy slots over the summer holidays - pointing to the involvement of groups such as the Hertfordshire Sports Partnership and the Hertfordshire Community Foundation.

Leader of the county council Cllr Richard Roberts welcomed the additional support for children - suggesting it could have a real impact when they return to the classroom, in September. He said: "This is entirely consistent with the recovery strategy - with supporting families, with supporting children during the summer holidays so they can maintain activity levels. "We know that we have children that we need to get back on track academically.

"So if our children come back into education in September fighting fit and ready to go, more opportunity to really increase the learning in September onwards."

According to the report to the cabinet, the council has entered into an agreement with Edenred, in order to make the issuing and redeeming of vouchers 'more straightforward'.

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Free school holiday programme for Hemel Hempstead children

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Car ‘super salesman’ said to have duped Stellantis out of £6m in sophisticated discount code scam

A car salesman has been charged with defrauding the manufacturer Stellantis out of more than GBP6m in a sophisticated scam. Federal officials said Apollon 'Apollo' Nimo, 34, used discount codes to offer Dodge, Jeep, Chrysler and Ram buyers better deals than they should have received. Nimo - who was the country's best selling salesman - has been charged with wire fraud over the scam that is said to have used employee discounts for non-FCA staff.

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Over a seven year period, FCA - now Stellantis - is believed to have lost £8.7m (GBP6.3m) as Nimo used Employee Purchase Control Numbers as discount codes to get buyers a five per cent reduction on the sale or lease of cars.

The apparent super salesman sold 250 cars in one month alone and his manager told investigating officers that he would often sell more vehicles than 'entire sales departments at most FCA dealerships'. Between 2014 and 2021, nearly nine out of 10 of Nimo's sales were linked to the discount codes, reported Fox 2 Detroit. Car manufacturers across the world use discount codes like this to offer friends and family better rates on cars.

Advert

The Stellantis codes give customers a discounted price, funded by the manufacturer.

The selling dealer gets the full amount for the car. In the UK, many car makers offer staff at dealerships or the manufacturer head office preferential prices like this.

[embedded content]

The car salesman, who worked at the brand's Parkway dealership in Detroit, was paid £700,000 (GBP507k) over the seven year period.  Nimo is believed to have used 268 unauthorised employee discount codes which federal investigators say he picked up from the black market on Facebook groups.

He would put buyers in touch with retired FCA workers who could still get the discount codes and pass them on to buyers. Those buyers who questioned the legality of the deals were told by Nimo that 'FCA does not review them'. In 2014, Feds say Nimo's father leased three cars from his son using the special rates.

If convicted, Nimo faces 20 years in jail.

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Car ‘super salesman’ said to have duped Stellantis out of £6m in sophisticated discount code scam

A car salesman has been charged with defrauding the manufacturer Stellantis out of more than GBP6m in a sophisticated scam. Federal officials said Apollon 'Apollo' Nimo, 34, used discount codes to offer Dodge, Jeep, Chrysler and Ram buyers better deals than they should have received. Nimo - who was the country's best selling salesman - has been charged with wire fraud over the scam that is said to have used employee discounts for non-FCA staff.

Advert

Over a seven year period, FCA - now Stellantis - is believed to have lost £8.7m (GBP6.3m) as Nimo used Employee Purchase Control Numbers as discount codes to get buyers a five per cent reduction on the sale or lease of cars.

The apparent super salesman sold 250 cars in one month alone and his manager told investigating officers that he would often sell more vehicles than 'entire sales departments at most FCA dealerships'. Between 2014 and 2021, nearly nine out of 10 of Nimo's sales were linked to the discount codes, reported Fox 2 Detroit. Car manufacturers across the world use discount codes like this to offer friends and family better rates on cars.

Advert

The Stellantis codes give customers a discounted price, funded by the manufacturer.

The selling dealer gets the full amount for the car. In the UK, many car makers offer staff at dealerships or the manufacturer head office preferential prices like this.

[embedded content]

The car salesman, who worked at the brand's Parkway dealership in Detroit, was paid £700,000 (GBP507k) over the seven year period.  Nimo is believed to have used 268 unauthorised employee discount codes which federal investigators say he picked up from the black market on Facebook groups.

He would put buyers in touch with retired FCA workers who could still get the discount codes and pass them on to buyers. Those buyers who questioned the legality of the deals were told by Nimo that 'FCA does not review them'. In 2014, Feds say Nimo's father leased three cars from his son using the special rates.

If convicted, Nimo faces 20 years in jail.

Categories
Coupons & Offers

Car ‘super salesman’ said to have duped Stellantis out of £6m in sophisticated discount code scam

A car salesman has been charged with defrauding the manufacturer Stellantis out of more than GBP6m in a sophisticated scam. Federal officials said Apollon 'Apollo' Nimo, 34, used discount codes to offer Dodge, Jeep, Chrysler and Ram buyers better deals than they should have received. Nimo - who was the country's best selling salesman - has been charged with wire fraud over the scam that is said to have used employee discounts for non-FCA staff.

Advert

Over a seven year period, FCA - now Stellantis - is believed to have lost £8.7m (GBP6.3m) as Nimo used Employee Purchase Control Numbers as discount codes to get buyers a five per cent reduction on the sale or lease of cars.

The apparent super salesman sold 250 cars in one month alone and his manager told investigating officers that he would often sell more vehicles than 'entire sales departments at most FCA dealerships'. Between 2014 and 2021, nearly nine out of 10 of Nimo's sales were linked to the discount codes, reported Fox 2 Detroit. Car manufacturers across the world use discount codes like this to offer friends and family better rates on cars.

Advert

The Stellantis codes give customers a discounted price, funded by the manufacturer.

The selling dealer gets the full amount for the car. In the UK, many car makers offer staff at dealerships or the manufacturer head office preferential prices like this.

[embedded content]

The car salesman, who worked at the brand's Parkway dealership in Detroit, was paid £700,000 (GBP507k) over the seven year period.  Nimo is believed to have used 268 unauthorised employee discount codes which federal investigators say he picked up from the black market on Facebook groups.

He would put buyers in touch with retired FCA workers who could still get the discount codes and pass them on to buyers. Those buyers who questioned the legality of the deals were told by Nimo that 'FCA does not review them'. In 2014, Feds say Nimo's father leased three cars from his son using the special rates.

If convicted, Nimo faces 20 years in jail.

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UK energy customers may be automatically moved to cheaper deals

Households using standard energy tariffs to buy their gas and electricity could soon be automatically moved on to cheaper energy deals under proposals put forward by the UK government. The plans could result in millions of households on standard variable energy tariffs being switched to better-value energy deals unless they choose to opt out of the proposed scheme, which will be put to an industry consultation in the spring. The government will also consult on an opt-in scheme that would require households to actively choose to be part of a scheme that moves homes to a new deal as part of a collective switch.

At the same time, officials will work with the industry regulator, Ofgem, to stop bill payers rolling back on to standard variable tariffs at the end of a fixed-term energy contract, to prevent homes returning to the default tariffs. Standard energy tariffs are often referred to as a loyalty penalty because they are typically more expensive than competitive fixed-rate deals designed to win over customers from their existing energy supplier. The shift to automatic switching would be the government's boldest step to intervene on energy bills after it legislated to keep a lid on standard variable tariffs through an energy price cap to end "rip off" tariffs.

The government set out its plans to kickstart a fairer energy market as part of an industry-wide overhaul to make Britain's energy system cleaner and more affordable as we move towards a "net zero carbon" future. The government's energy white paper - which sets out major investments in reducing carbon emissions from the energy system - also includes at least GBP6.7bn over the next six years to support socially vulnerable and fuel-poor homes by opening up its existing warm home discount scheme to more households.

[embedded content]

Alok Sharma, the business and energy secretary, said the government will "place affordability and fairness at the heart of our reforms - unleashing a wave of competition so consumers get the best deals possible on their bills, while protecting the vulnerable and fuel poor with additional financial support". Industry trials of collective switching have already helped 94,000 homes move to better energy deals, which helped them to save a combined total of GBP21.3m, according to the government.

Alistair Cromwell, the acting chief executive of Citizens Advice, said "testing new ways to tackle the loyalty penalty is the right approach" to make sure the government's green industrial revolution is fair.

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Impact Investment Exchange launches $27m bond to help women in Asia rebuild livelihoods post-Covid

Singapore-based Impact Investment Exchange (IIX) has issued its US£27m Women's Livelihood Bond 3 (WLB3), the third in the £150m WLB series of gender bonds aimed at creating sustainable livelihoods for more than 3 million women in developing countries.

WLB3 will be backing enterprises in India, Indonesia, Cambodia and the Philippines that are directly supporting women to respond to or recover from the economic effects of the pandemic.

The issuance closes on 10 December and the bond offers a 3.95% coupon for a four-year tenor. The total bond size includes a £24.7m issuance and £3m subordinated debt provided by IIX's newly-launched Women's Catalyst Fund (WCF) as first loss capital. This is the maiden investment for WCF, a gender-lens investment vehicle which helps underserved women in developing countries to recover from Covid-19.

IIX Women's Livelihood Bonds - woman in South Asia

Above: IIX's third Women's Livelihood Bond will help women to recover from the economic effects of Covid-19

Investors include American asset manager Nuveen and New Zealand-based fund manager Pathfinder NZ.

IIX counts a number of private and public partners, including the United States Agency for International Development (USAID), law firm Latham & Watkins, Australian bank ANZ and the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP).

IIX's CEO and founder, Professor Durreen Shahnaz, said, "At a time when Covid-19 caused governments, investors and businesses to turn inward and leave behind millions of underserved women, we took a stand to do what is right. We closed a deal of immense proportions during a pandemic, and taught the world's leading institutions how to create a new financial product that works for the 99%."

We taught the world's leading institutions how to create a new financial product that works for the 99%

IIX aimed to push the boundaries of the financial markets through its innovative financial instruments, Shahnaz added, and to "create truly systemic change that will outlast any pandemic."

IIX, the only non-bank issuer of gender bonds, launched its first WLB series bond in 2017, the first impact investing instrument to be publicly listed, on the Singapore Exchange. The WLB1 mobilised £8m, offering a 5.65% coupon for a four-year tenor.

IIX issued its £12m second WLB in January, priced at 4% for a four-year tenor.

These bonds differ from social impact bonds as they mobilise private sector capital to generate positive social impact, offer financial returns independent of social outcomes, and are able to be listed on both social and traditional exchanges.

Paul White, head of capital markets at ANZ, the lead placement agent, said the transaction was well received from a broad spectrum of investors looking for a social impact investment.

"IIX and the Women's Livelihood Bond 3 are aligned with our purpose to shape a world where people and communities thrive," he said.

Image credits: IIX

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Is Secure Energy Services Inc. (TSE:SES) Trading At A 39% Discount?

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Secure Energy Services Inc. (TSE:SES) as an investment opportunity by taking the expected future cash flows and discounting them to their present value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model. See our latest analysis for Secure Energy Services

Is Secure Energy Services fairly valued?

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth.

In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To begin with, we have to get estimates of 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. A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) forecast

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Levered FCF (CA£, Millions)

CA£91.5m

CA£70.7m

CA£59.3m

CA£53.0m

CA£49.2m

CA£47.1m

CA£45.8m

CA£45.2m

CA£45.1m

CA£45.1m

Growth Rate Estimate Source

Analyst x6

Analyst x3

Est @ -16.05%

Est @ -10.73%

Est @ -7.02%

Est @ -4.41%

Est @ -2.59%

Est @ -1.32%

Est @ -0.42%

Est @ 0.2%

Present Value (CA£, Millions) Discounted @ 14%

CA£80.5

CA£54.7

CA£40.4

CA£31.7

CA£25.9

CA£21.8

CA£18.7

CA£16.2

CA£14.2

CA£12.5

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CA£316m

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (1.7%) to estimate future growth.

In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 14%. Terminal Value (TV)= FCF2030 x (1 + g) / (r - g) = CA£45mx (1 + 1.7%) / (14%- 1.7%) = CA£382m Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CA£382m/ ( 1 + 14%)10= CA£106m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is CA£422m. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of CA£1.6, the company appears quite good value at a 39% discount to where the stock price trades currently.

The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

dcf dcf

The assumptions

We would point out that 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 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 Secure Energy Services 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 14%, which is based on a levered beta of 2.000. 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.

Next Steps:

Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" 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.

What is the reason for the share price sitting below the intrinsic value? For Secure Energy Services, we've compiled three additional items you should further research:

  1. Risks: Take risks, for example - Secure Energy Services has 2 warning signs we think you should be aware of.

  2. Future Earnings: How does SES'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.

  3. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business.

    Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

PS. Simply Wall St updates its DCF calculation for every Canadian stock every day, so if you want to find the intrinsic value of any other stock just search here. This article by Simply Wall St is general in nature.

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.

Have feedback on this article?

Concerned about the content? Get in touch with us directly. Alternatively, email [email protected]wallst.com.

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Is Taylor Wimpey plc (LON:TW.) Trading At A 37% Discount?

View photos

Today we will run through one way of estimating the intrinsic value of Taylor Wimpey plc (LON:TW.) by projecting its future cash flows and then discounting them to today's value.

Our analysis will employ the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios.

Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

Check out our latest analysis for Taylor Wimpey

The calculation

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows.

Generally the first stage is higher growth, and the second stage is a lower growth phase. In the first stage we need to estimate the cash flows to the business over the next ten years. 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 discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Levered FCF (GBP, Millions) UKGBP271.7m UKGBP387.1m UKGBP446.0m UKGBP488.3m UKGBP522.5m UKGBP550.0m UKGBP572.3m UKGBP590.7m UKGBP606.1m UKGBP619.4m
Growth Rate Estimate Source Analyst x8 Analyst x7 Analyst x1 Est @ 9.48% Est @ 7% Est @ 5.27% Est @ 4.05% Est @ 3.2% Est @ 2.61% Est @ 2.19%
Present Value (GBP, Millions) Discounted @ 9.3% UKGBP249 UKGBP324 UKGBP342 UKGBP342 UKGBP335 UKGBP323 UKGBP307 UKGBP290 UKGBP273 UKGBP255

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = UKGBP3.0b

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth.

In this case we have used the 5-year average of the 10-year government bond yield (1.2%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 9.3%.

Terminal Value (TV)= FCF2030 x (1 + g) / (r - g) = UKGBP619mx (1 + 1.2%) / (9.3%- 1.2%) = UKGBP7.8b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= UKGBP7.8b/ ( 1 + 9.3%)10= UKGBP3.2b

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is UKGBP6.2b.

In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of UKGBP1.1, the company appears quite good value at a 37% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy.

Do keep this in mind.

The assumptions

We would 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 these result, have a go at the calculation yourself and play with the assumptions. 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 Taylor Wimpey 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 9.3%, which is based on a levered beta of 1.165. 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.

Story continues

Looking Ahead:

Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company.

DCF models are not the be-all and end-all of investment valuation. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result.

What is the reason for the share price sitting below the intrinsic value? For Taylor Wimpey, we've compiled three further elements you should assess:

  1. Risks: Be aware that Taylor Wimpey is showing 1 warning sign in our investment analysis , you should know about...
  2. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for TW.'s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
  3. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business.

    Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

PS. Simply Wall St updates its DCF calculation for every British stock every day, so if you want to find the intrinsic value of any other stock just search here.

This article by Simply Wall St is general in nature. 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.

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