Are Van Elle Holdings plc (LON:VANL) investors paying more than the intrinsic value?

Key findings

• The forecast fair value for Van Elle Holdings is 0.32 GBP based on the 2-step Free Cash Flow to Equity
• The current share price of 0.40 GBP suggests that Van Elle Holdings may be overvalued by 23%
• Van Elle Holdings’ competitors are currently trading at an average discount of 24%.

How far is Van Elle Holdings plc (LON:VANL) from its intrinsic value? Using the most recent financial data, we will examine whether the stock is fairly valued by taking the expected future cash flows and discounting them to their present value. One way to do this is by applying the Discounted Cash Flow (DCF) model. Models like this may seem incomprehensible to a layperson, but they are relatively easy to follow.

However, keep in mind that there are many ways to estimate the value of a company, and a DCF is just one of them. For those who enjoy stock analysis, the analysis model presented here by Simply Wall St might be of interest.

Check out our latest analysis for Van Elle Holdings

The calculation

We use what is called a 2-stage model, which simply means that we have two different growth periods for the company’s cash flows. Generally speaking, the first stage is one of higher growth, and the second stage is one of lower growth. First, we need to get estimates for 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 that companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will slow their growth rate, over this period. We do this to take into account that growth tends to slow more in the early years than in later years.

A DCF is all about the idea that a dollar in the future is worth less 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) forecast

(“Est” = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = £18 million

The second phase is also called the terminal value, which is the company’s cash flow after the first phase. The Gordon growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average of the 10-year Treasury yield of 1.8%. We discount the terminal cash flows to today’s value at a cost of equity of 7.8%.

Final value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = £2.0 million × (1 + 1.8%) ÷ (7.8% – 1.8%) = £34 million

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= £34 million ÷ (1 + 7.8%)¹⁰= £16 million

The total value or equity value is then the sum of the present value of future cash flows, which in this case is £34m. In the final step, we divide the equity value by the number of shares in issue. Relative to the current share price of £0.4, the company appears slightly overvalued at the time of writing. However, valuations are imprecise instruments, much like a telescope – move a few degrees and you end up in another galaxy. Keep this in mind.

The assumptions

We should point out that the key inputs to a discounted cash flow are the discount rate and of course the actual cash flows. Part of investing is making your own assessment of a company’s future performance, so try the calculation yourself and check your own assumptions. DCF also does not take into account the possible cyclicality of an industry or a company’s future capital needs, and therefore does not provide a complete picture of a company’s potential performance. Since we are considering Van Elle Holdings as prospective 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 takes debt into account. In this calculation, we used 7.8%, which is based on a leveraged beta of 1.105. Beta is a measure of a stock’s volatility relative to the overall market. We get our beta from the industry average beta of globally comparable companies, with a set limit between 0.8 and 2.0, which is a reasonable range for a stable company.

SWOT analysis for Van Elle Holdings

Looking ahead:

While important, ideally the DCF calculation should not be the only analysis you consider for a company. DCF models are not the be-all and end-all of investment valuation. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to an undervaluation or overvaluation of the company. If a company grows at a different rate, or if its cost of equity or risk-free rate changes significantly, the outcome may look very different. What is the reason for the share price to exceed the intrinsic value? For Van Elle Holdings, we have compiled three relevant points for you to consider:

1. Risks: For example, we found 3 warning signs for Van Elle Holdings that you should know before investing here.
2. management:Have insiders increased their shares to capitalize on market sentiment regarding VANL’s future prospects? Read our management and board analysis with insights into CEO compensation and governance factors.
3. Other solid companies: Low debt, high returns on equity, and good past performance are the foundation of a strong company. Check out our interactive list of stocks with solid business fundamentals to see if there are any other companies you may not have considered!

PS Simply Wall St updates its DCF calculation for each UK stock daily, so if you want to find out the intrinsic value of another stock, just search here.

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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.

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