Estimating The Fair Value Of Symphony Environmental Technologies plc (LON:SYM)

Simply Wall St
·6 min read

Does the October share price for Symphony Environmental Technologies plc (LON:SYM) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the expected future cash flows and discounting them to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. Don't get put off by the jargon, the math behind it is actually quite straightforward.

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 Symphony Environmental Technologies

Crunching the numbers

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 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.

Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Levered FCF (£, Millions)

UK£745.0k

UK£1.32m

UK£1.81m

UK£2.27m

UK£2.69m

UK£3.05m

UK£3.35m

UK£3.59m

UK£3.78m

UK£3.93m

Growth Rate Estimate Source

Analyst x1

Analyst x1

Est @ 36.43%

Est @ 25.87%

Est @ 18.47%

Est @ 13.3%

Est @ 9.67%

Est @ 7.14%

Est @ 5.36%

Est @ 4.12%

Present Value (£, Millions) Discounted @ 7.7%

UK£0.7

UK£1.1

UK£1.4

UK£1.7

UK£1.9

UK£2.0

UK£2.0

UK£2.0

UK£1.9

UK£1.9

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = UK£16m

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 1.2%. We discount the terminal cash flows to today's value at a cost of equity of 7.7%.

Terminal Value (TV)= FCF2030 × (1 + g) ÷ (r – g) = UK£3.9m× (1 + 1.2%) ÷ (7.7%– 1.2%) = UK£62m

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= UK£62m÷ ( 1 + 7.7%)10= UK£30m

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£46m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of UK£0.3, the company appears about fair value at a 3.0% 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.

dcf
dcf

The 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 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 Symphony Environmental Technologies 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 7.7%, which is based on a levered beta of 0.930. 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:

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. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Symphony Environmental Technologies, we've put together three fundamental items you should explore:

  1. Risks: Consider for instance, the ever-present spectre of investment risk. We've identified 4 warning signs with Symphony Environmental Technologies , and understanding these should be part of your investment process.

  2. Future Earnings: How does SYM'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 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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