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Frasers Group Plc a significant palyer of consumer cyclical sector has a projected fair value of £7.33, based on a 2-stage Free Cash Flow to Equity (FCFE) model. Currently, the company's share price stands at £8.68, which is close to this estimated fair value. Analysts have set a price target of £10.23 for Frasers Group, suggesting a 39% increase from the fair value estimate.
To determine the intrinsic value of Frasers Group (LSE:FRAS), a Discounted Cash Flow (DCF) model is used, which involves projecting future cash flows and discounting them to present value. This approach, while seemingly complex, is a common method for valuation.
Valuation Methodology
The 2-stage DCF model involves two distinct phases of cash flow growth. The initial stage assumes a higher growth rate, while the second stage reflects a lower growth rate. For the first stage, cash flows are projected over the next ten years. Analyst estimates are preferred when available; otherwise, previous free cash flow values are extrapolated. It is assumed that companies with declining free cash flow will experience a slower rate of decline, whereas those with increasing free cash flow will see a gradual slowdown in growth.
The second stage, known as Terminal Value, represents the business's cash flows beyond the first stage. The Gordon Growth formula calculates Terminal Value based on a future annual growth rate equal to the 5-year average yield of 10-year government bonds, which is 1.9%. These terminal cash flows are then discounted to their present value using a cost of equity of 7.9%.
Valuation Outcome
The total equity value, derived from summing the projected cash flows for the next decade and the discounted terminal value, amounts to £3.2 billion. By dividing this total equity value by the number of shares outstanding, the intrinsic value per share is obtained. With Frasers Group's current share price at £8.68, the valuation indicates that the stock is approximately at its fair value.
It is important to note that valuation calculations are influenced by various assumptions, and thus, should be considered as rough estimates rather than precise figures. Different valuation techniques may yield different results, and each has its advantages and limitations.
