Is Flutter Entertainment plc (LON: FLTR ) trading at a 26% discount?

Today we will briefly describe the valuation methodology used to assess the attractiveness of Flutter Entertainment plc (London: FLTR) as an investment opportunity, discounting expected future cash flows to today’s value. The discounted cash flow (DCF) model is the tool we will use to do this. Don’t be put off by the jargon, the math behind it is actually pretty simple.

We generally think of a company as being worth the present value of all the cash it will generate in the future. However, DCF is only one of many valuation metrics and is not without its flaws.If you want to learn more about discounted cash flows, you can find them at Simply Wall St Analysis Model.

Check out our latest analysis for Flutter Entertainment

the model

We are using a two-stage growth model, which simply means that we consider two stages of company growth. A company may have a high growth rate in the initial stage, while the second stage usually assumes a steady growth rate. First, we need to estimate the cash flows for the next ten years. Where possible, we use analysts’ estimates, but when these are not available, we extrapolate prior free cash flow (FCF) based on the last estimate or reported value. We assume that companies with shrinking free cash flow will contract at a slower rate, while companies with growing free cash flow will experience slower growth rates over the period. We do this to reflect that growth tends to slow more in earlier years than in later years.

Usually we 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:

10-Year Free Cash Flow (FCF) Estimation

(“Est” = Simply Wall St estimated FCF growth rate)
10-Year Present Value of Cash Flows (PVCF) = UK £12b

We now need to calculate the terminal value, which represents all future cash flows after this decade. The Gordon Growth Formula is used to calculate the future value of the 5-year average of the 10-year government bond yield with a future annual growth rate equal to 1.0%. We discount the terminal cash flows to today’s value at a cost of equity of 8.2%.

Future Value (TV)= free cash flow₂₀₃₂ × (1 + g) ÷ (r – g) = UK£2.5b× (1 + 1.0%) ÷ (8.2%– 1.0%) = UK£34b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= UK£34b÷ ( 1 + 8.2%)¹⁰= UK £16b

The total value or equity value is the sum of the present value of the future cash flows, in this case £27b. To get intrinsic value per share, we divide it by the total number of shares outstanding. Relative to its current share price of £115, the company appears to be 26% undervalued and 26% below its current share price. But remember, this is only an approximate estimate, and like any complex formula – garbage in, garbage out.

important assumptions

We would like to point out that the most important inputs to discounting cash flows are the discount rate and of course the actual cash flows. You don’t have to agree with these inputs, I suggest you recalculate it yourself and try it out. The DCF also does not take into account the likely cyclicality of the industry or the future capital requirements of the company, so it does not give the full picture of the company’s potential performance. Given that we consider Flutter Entertainment as a potential shareholder, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) accounting for debt. In this calculation, we used 8.2%, which is based on a leveraged beta of 1.103. Beta is a measure of a stock’s volatility relative to the overall market. Our beta is derived from the industry average beta of globally comparable companies, limited between 0.8 and 2.0, which is a reasonable range for a stable business.

SWOT Analysis of Flutter Entertainment

Looking to the future:

While a company’s valuation is important, it’s only one of many factors you’ll need to evaluate a company. The DCF model is not the be all and end all of investment valuation. Instead, the best use of the DCF model is to test certain assumptions and theories to see if they cause companies to be undervalued or overvalued. If a company grew at a different rate, or if its cost of equity or risk-free rate changed drastically, the output could be very different. Can we figure out why the company is trading below intrinsic value? For Flutter Entertainment, we’ve put together three related projects that you should check further:

1. risk: We think you should evaluate 1 Flutter Entertainment warning sign Before making an investment in a company, we have marked it.
2. manage: Have insiders been accumulating shares to take advantage of what the market thinks about FLTR’s future prospects?look at our Management and Board Analysis Insights into CEO compensation and governance factors.
3. Other High Quality Alternatives: Do you like a good all-rounder?explore Our Interactive List of Premium Stocks Find out what else you might be missing!

postscript. Simply Wall St updates the DCF calculations for each UK stock daily, so if you want to find the intrinsic value of any other stock, just search here.

Have feedback on this article? Concerned about content? keep in touch Contact us directly. Alternatively, email the editorial team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We use only an unbiased methodology to provide reviews based on historical data and analyst forecasts, 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 objectives or your financial situation. Our goal is to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no positions in any of the stocks mentioned.