Key Insights
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Using the 2 Stage Free Cash Flow to Equity, A.G. BARR fair value estimate is UK£12.23
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A.G. BARR is estimated to be 48% undervalued based on current share price of UK£6.38
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Analyst price target for BAG is UK£7.57 which is 38% below our fair value estimate
Today we will run through one way of estimating the intrinsic value of A.G. BARR p.l.c. ( LON:BAG ) by taking the forecast future cash flows of the company and discounting them back to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. 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 .
What's The Estimated Valuation?
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. 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.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) estimate
| 2026 |
2027 |
2028 |
2029 |
2030 |
2031 |
2032 |
2033 |
2034 |
2035 |
|
|---|---|---|---|---|---|---|---|---|---|---|
| Levered FCF (£, Millions) |
UK£30.8m |
UK£38.8m |
UK£47.5m |
UK£53.3m |
UK£58.3m |
UK£62.7m |
UK£66.6m |
UK£70.0m |
UK£73.2m |
UK£76.2m |
| Growth Rate Estimate Source |
Analyst x5 |
Analyst x5 |
Analyst x4 |
Est @ 12.18% |
Est @ 9.42% |
Est @ 7.49% |
Est @ 6.14% |
Est @ 5.20% |
Est @ 4.53% |
Est @ 4.07% |
| Present Value (£, Millions) Discounted @ 7.1% |
UK£28.7 |
UK£33.8 |
UK£38.7 |
UK£40.6 |
UK£41.5 |
UK£41.6 |
UK£41.3 |
UK£40.5 |
UK£39.6 |
UK£38.5 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF)= UK£385m
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 3.0%. We discount the terminal cash flows to today's value at a cost of equity of 7.1%.
Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = UK£76m× (1 + 3.0%) ÷ (7.1%– 3.0%) = UK£1.9b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= UK£1.9b÷ ( 1 + 7.1%)10= UK£971m
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£1.4b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of UK£6.4, the company appears quite good value at a 48% 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.
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 A.G. BARR 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 7.1%, which is based on a levered beta of 0.800. 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.
Check out our latest analysis for A.G. BARR
SWOT Analysis for A.G. BARR
Strength
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Earnings growth over the past year exceeded the industry.
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Debt is not viewed as a risk.
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Dividends are covered by earnings and cash flows.
Weakness
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Dividend is low compared to the top 25% of dividend payers in the Beverage market.
Opportunity
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Annual revenue is forecast to grow faster than the British market.
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Trading below our estimate of fair value by more than 20%.
Threat
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Annual earnings are forecast to grow slower than the British market.
Looking Ahead:
Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. 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 A.G. BARR, we've compiled three fundamental elements you should consider:
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Risks: Every company has them, and we've spotted 1 warning sign for A.G. BARR you should know about.
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Future Earnings: How does BAG'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 .
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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 LSE 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.
