Is Made Tech Group Plc (LON:MTEC) trading at a 49% discount?

key insights

Does Made Tech Group Plc (LON:MTEC)'s May share price reflect its actual value? Today we will explore the stock's intrinsic value by forecasting its future cash flows and discounting them to today's value. Estimate the value. Our analysis uses a discounted cash flow (DCF) model. Although such a model may seem beyond the comprehension of a layman, it is very easy to follow.

We generally think of a company's value as the present value of all the cash it will generate in the future. However, DCF is just one valuation metric among many, and it is not without its flaws. If you're still in doubt about this type of valuation, take a look at the Simply Wall St analysis model.

Check out our latest analysis for Made Tech Group.

calculation

We use a two-stage growth model. This means considering his two stages of company growth. In the initial stage, a company may have a higher growth rate, and in the second stage, it is usually considered to have a stable growth rate. The first step is to estimate the cash flow to the business over the next 10 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 that companies with shrinking free cash flow will see their rate of shrinkage slow, and companies with growing free cash flow will see their growth rate slow over this period. This is to reflect that growth tends to be slower in the early years than in later years.

We generally assume that a dollar today is worth more than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars.

Estimated 10-year free cash flow (FCF)

(“Est” = FCF growth rate estimated by Simply Wall St)
Present Value of 10-Year Cash Flows (PVCF) = British Pound 13 million

story continues

Now we need to calculate the terminal value, which calculates all future cash flows after this 10-year period. A very conservative growth rate that does not exceed the country's GDP growth rate is used for several reasons. In this case, we used the five-year average of the 10-year Treasury yield (1.8%) to predict future growth. As with the 10-year “growth” period, we discount future cash flows to today's value and use a cost of equity of 7.6%.

Terminal value (TV)=FCF₂₀₃₃ × (1 + g) ÷ (r – g) = GBP 4.4 million × (1 + 1.8%) ÷ (7.6% – 1.8%) = GBP 77 million

Present Value of Terminal Value (PVTV)= TV / (1 + r)^Ten= GBP 77 million ÷ (1 + 7.6%)^Ten= 37 million British pounds

The total value is the sum of the next 10 years' cash flows plus the discounted terminal value, resulting in a total capital value calculation. In this case, this would be 50 million British pounds. To get the intrinsic value per share, divide this by the total number of shares outstanding. Compared to the current share price of £0.2, the company looks like very good value at a 49% discount to the current share price. It is best to view this as a rough estimate, not accurate to the last cent, as the assumptions in the calculations have a significant impact on the valuation.

assumption

The above calculation relies heavily on two assumptions. One is the discount rate and the other is the cash flow. You are not required to agree to these inputs. I encourage you to redo the calculations yourself and give it a try. Additionally, DCF does not give a complete picture of a company's potential performance because it does not take into account the cyclicality of the industry or the company's future capital requirements. Given that we are considering Made Tech Group as a potential shareholder, the cost of equity is used as the discount rate, rather than the cost of equity taking into account debt (or weighted average cost of capital, WACC). For this calculation, we used 7.6% based on a leverage beta of 1.059. Beta is a measure of a stock's volatility in comparison to the market as a whole. Beta values ​​are derived from industry average beta values ​​for globally comparable companies and are constrained to a range of 0.8 to 2.0, which is a reasonable range for stable businesses.

Future prospects:

Valuation is just one side of the coin when it comes to building an investment thesis, and it's just one of the many factors that need to be used to evaluate a company. It is not possible to obtain a reliable valuation with the DCF model. If possible, it's a good idea to apply different cases and assumptions and see how they affect the company's valuation. Outcomes can vary widely if companies grow at different rates or if their cost of equity or risk-free rate changes rapidly. Can you uncover why the company is trading at a discount to its intrinsic value? In the case of Made Tech Group, there are three fundamental aspects to evaluate.

1. risk: For example, taking risks – Made Tech Group 3 warning signs (And the two we don't really like) that we think you should know about.

2. future earnings: How does MTEC's growth rate compare to its peers and the broader market? Dive deeper into analyst consensus numbers for the coming years by interacting with the free Analyst Growth Expectations chart.

3. Other high quality alternatives: Do you like a good all-rounder? Explore our interactive list of quality stocks to figure out what else you're missing.

PS. Simply Wall St updates DCF calculations for all UK stocks daily, so if you want to know the intrinsic value of other stocks, search here.

Have feedback about this article? Concern about the content? contact Please contact us directly. Alternatively, email our editorial team at Simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst forecasts, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.