Does Flutter Entertainment plc (LON:FLTR) offer a 32% discount?

Today we will look at one way to estimate the intrinsic value of Flutter Entertainment plc (LON:FLTR) by projecting its future cash flows and then discounting them to today’s value. We will leverage the Discounted Cash Flow (DCF) model for this purpose. It may sound complicated, but it’s actually quite simple!

We generally believe that the value of a business is the present value of all the money it will generate in the future. However, a DCF is just one evaluation metric among many, and it’s not without its flaws. If you still have some burning questions about this type of valuation, check out the analysis template Simply Wall St.

View our latest analysis for Flutter Entertainment

Crunching the numbers

We will use a two-phase DCF model, which, as the name implies, takes into account two phases of growth. The first phase is generally a period of higher growth which stabilizes towards the terminal value, captured in the second period of “steady growth”. To begin with, we need to get estimates of the next ten years of cash flows. We use analyst estimates where possible, but when these are not available we extrapolate previous free cash flow (FCF) from the latest estimate or reported value. We assume that companies with declining free cash flow will slow their rate of contraction and that companies with growing free cash flow will see their growth rate slow over this period. We do this to reflect on the fact that growth tends to slow down more in the first few years than in the following years.

A DCF centers around the idea that a dollar in the future is worth less than a dollar today, so we need to discount the sum of these future cash flows to arrive at an estimate of present value:

Estimated 10-year free cash flow (FCF).

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

Leveraged FCF (£, million)

UK £765.4 million

UK £1.11 billion

UK £1.52 billion

UK £1.77 billion

UK £1.95 billion

UK £2.09 billion

UK £2.20 billion

UK £2.29 billion

UK £2.37 billion

UK £2.43 billion

Growth rate estimate source

Analyst x12

Analyst x11

Analyst x3

Analyst x1

Estimate @ 10.1%

Estimate @ 7.37%

Estimate @ 5.45%

Estimate @ 4.12%

Estimate @ 3.18%

Estimate @ 2.52%

Present value (£, million) discounted at 7.7%

UK £711

UK £960

UK £1.2k

UK £1.3k

UK £1.3k

UK £1.3k

UK £1.3k

UK £1.3k

UK £1.2k

UK £1.2k

(“East” = FCF growth rate estimated by Simply Wall St)
10-Year Present Value of Cash Flow (PVCF) = UK £12bn

The second stage is also known as Terminal Value, this is the company’s cash flow after the first stage. The Gordon Growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average 10-year government bond yield of 1.0%. We discount terminal cash flows to today’s value at a cost of equity of 7.7%.

Terminal value (TV)=FFC2032 × (1 + g) ÷ (r – g) = UK £2.4bn × (1 + 1.0%) ÷ (7.7%– 1.0%) = UK £36bn

Terminal value present value (PVTV)= Television / (1 + r)10= UK £36bn ÷ ( 1 + 7.7%)10= UK £17bn

Total Value is the sum of cash flows for the next ten years plus discounted terminal value, which translates into Total Equity Value, which in this case is £29 billion. To get the intrinsic value per share, we divide it by the total number of shares outstanding. Compared to its current £112 share price in the UK, the company appears to be quite good value at a 32% discount to where the share price currently trades. Remember though that this is only a rough estimate and, like any complex formula, trash in, trash out.

dcf

dcf

The Hiring

The above calculation depends heavily on two assumptions. The first is the discount rate and the other is the cash flows. Part of investing is making your own assessment of a company’s future performance, so try the calculation yourself and check your assumptions. The DCF also does not consider the possible cyclicality of an industry or a company’s future capital requirements, so it does not provide a complete picture of a company’s potential performance. Since we’re considering Flutter Entertainment 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. We have used 7.7% in this calculation, which is based on a leveraged beta of 1.116. Beta is a measure of a stock’s volatility, relative to the market as a whole. We obtain our beta from the average sector beta of comparable companies globally, with a cap imposed between 0.8 and 2.0, which is a reasonable range for a stable business.

To move on:

While valuing a company is important, it shouldn’t be the only metric to consider when researching a company. The DCF model is not a perfect stock valuation tool. Instead, the best use for a DCF model is to test certain assumptions and theories to see if they would undervalue or overvalue the company. For example, changes in the company’s cost of equity or risk-free rate can have a significant impact on valuation. Why is the intrinsic value higher than the current share price? For Flutter Entertainment, we’ve put together three important factors that you should look into:

  1. Financial health: Does FLTR have a healthy balance sheet? Check out our free balance sheet analysis with six simple checks on key factors like leverage and risk.

  2. future earnings: How does FLTR’s growth rate compare to its competitors and the broader market? Dig deeper into the analyst consensus number for the next few years by interacting with our free chart of analyst growth expectations.

  3. Other solid assets: Low debt, high returns on equity, and good past performance are key to a strong business. Why not explore our interactive list of stocks with strong company fundamentals to see if there are any other companies you may not have considered!

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

Do you have feedback on this article? Concerned about the content? Get in touch directly with us. Alternatively, please email editorial-team (at) simplywallst.com.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using unbiased methodology only and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell stock and does not take into account your goals or financial situation. We aim to offer you long-term focused analysis driven by fundamental data. Please 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 of the stocks mentioned.

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