Key Insights
- The expected fair value for Flutter Entertainment is UK £123 based on 2 Stage Free Cash Flow to Equity
- Flutter Entertainment is estimated to be 20% overvalued based on the current UK share price of £149
- The analyst price target for FLTR is UK £155, which is 26% above our fair value estimate.
How far is Flutter Entertainment plc (LON:FLTR) from its intrinsic value? Using the latest financial data, we can see if the stock is fairly priced by taking the expected future cash flow and discounting it to its present value. One way to achieve this is to use the Discounted Cash Flow (DCF) model. Models like this may appear incomprehensible to a layman, but they are easy to follow.
Companies can be valued in many ways, so we’ll point out that a DCF isn’t perfect in every situation. If you want to know more about discounted cash flow, the rationale behind this calculation can be read in detail in the review model of Simply Wall St.
Check out our latest analysis for Flutter Entertainment
What is Estimated Valuation?
We use the 2-stage growth model, which simply means that we consider two stages of the company’s growth. In the initial period the company may have a higher growth rate and the second period is usually assumed to have a stable growth rate. To begin, we need to estimate the next ten years of cash flow. Where possible, we use analyst estimates, but when they are not available we extrapolate past free cash flow (FCF) from the last estimate or reported amount. We believe that companies with declining free cash flow will slow their rate of decline, and that companies with growing free cash flow will see their growth slow, during this period. We do this to show that growth tends to be slower in the early years than in the later years.
We generally assume that a dollar today is worth more than a dollar in the future, and so the sum of these future cash flows is discounted to present value:
10-year free cash flow (FCF) estimate
2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | |
Leveraged FCF (£, Millions) | UK£745.8m | UK£1.14b | UK£1.46b | UK£1.74b | UK£1.89b | UK£1.99b | UK£2.08b | UK£2.14b | UK£2.20b | UK£2.25b |
Growth Rate Estimation Source | Analyst x14 | Analyst x14 | Analyst x10 | Analyst x3 | Analyst x1 | This @ 5.50% | This @ 4.20% | This @ 3.28% | This @ 2.64% | This @ 2.20% |
Present Value (£, Millions) discount @ 9.3% | UK£682 | UK£954 | UK£1.1k | UK£1.2k | UK£1.2k | UK£1.2k | UK£1.1k | UK£1.0k | UK£985 | UK£920 |
(“Est” = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = UK£10b
We need to calculate the Terminal Value, which accounts for all future cash flows after this ten-year period. The Gordon Growth formula is used to calculate the Terminal Value of the future annual growth rate equal to the 5-year average of the 10-year government bond yield of 1.2%. Let’s discount the terminal cash flows to the present value of the equity of 9.3%.
Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = UK£2.2b× (1 + 1.2%) ÷ (9.3%– 1.2%) = UK£28b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= UK£28b÷ ( 1 + 9.3%)10= UK£11b
The total value, or equity value, is the sum of the present value of the future cash flows, which in this case is UK£22b. To get the intrinsic value per share, we divide it by the total number of shares outstanding. Relative to the current UK share price of £149, the company appears slightly overvalued at the time of writing. Remember though, that this is only an approximate valuation, and like any complex formula – garbage in, garbage out.
Important Assumptions
The above calculation depends heavily on two assumptions. The first is the discount rate and the other is the cash flows. If you do not agree with these results, try to calculate yourself and play with the assumptions. DCF also does not take into account the possible cyclicality of an industry, or the future capital requirements of a company, so it does not provide a complete picture of a company’s potential performance. Given that we are looking at 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. In this calculation we used 9.3%, which is based on a levered beta of 1.144. Beta is a measure of a stock’s volatility, compared to the market as a whole. We derive our beta from the average industry beta of comparable companies worldwide, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
SWOT Analysis for Flutter Entertainment
- Debt is well covered by cash flow.
- Debt interest payments are not well covered.
- Expect to breakeven next year.
- There is sufficient cash runway for more than 3 years based on current free cash flow.
- Good value based on P/S ratio compared to estimated Fair P/S ratio.
- Significant insider purchases in the last 3 months.
- There are no apparent threats identified for FLTR.
Next Steps:
Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn’t be the only metric you look at when researching a company. It is not possible to obtain a null valuation using the DCF model. Better you use different cases and assumptions and see how they affect the company’s valuation. If a firm grows at a different rate, or if the cost of equity or risk free rate changes, the output will be very different. What causes the share price to exceed the intrinsic value? For Flutter Entertainment, we’ve compiled three additional items you should check out:
- Financial Health: Does FLTR have a healthy balance? Check out our free balance sheet analysis with six simple checks on key factors like leverage and risk.
- Future Income: How does FLTR’s growth rate compare to its peers and the broader market? Dig deeper into analyst consensus numbers for the coming years by interacting with our free analyst growth forecast chart.
- Other High Quality Alternatives: Do you like a good all-rounder? Check out our interactive list of high-quality stocks to get an idea of what else is out there that you might be missing!
PS. The Simply Wall St app performs a discounted cash flow valuation for every stock on the LSE every day. If you want to find the calculation for other stocks just search here.
Valuation is complicated, but we help make it simple.
Find out whether Flutter Entertainment may be overvalued or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and caveats, dividends, insider transactions and financial health.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased approach and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take into account your goals, 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 of the stocks mentioned.