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Borders and Southern Petroleum as valued by the Discounted Cash Flow Technique


Current Price
8.25p
Mkt Cap: £ 39.9m
Implied Valuation*


The Discounted Cashflow Model is the classic forward looking growth valuation method used by financial analysts.


Assumptions

The company's sustainable current free cash flow is $m.
Cashflow

As this is an equity DCF valuation, it should use free cash flow to equity (FCFE), rather than free cash flow to the firm (FCFF or unlevered free cash flow). Strictly speaking, FCFE equals i) operating cash flow minus ii) capital expenditure required to sustain growth plus iii) net borrowings minus iv) preferred dividends, although we use operating cashflow minus total capital expenditure as a proxy for FCFE.

For stable companies, the current year cashflow figure may suffice, or it may be better to use an average of several years' cashflows if cashflows are more volatile. To smooth out volatility, we employ a simple average of both values.

Borders and Southern Petroleum Hints
Latest Annual Free Cash Flow $-32.8m
3 Yr Average Free Cash Flow $-81.3m
I expect cashflow to grow at a rate of % for the next years.  
The Growth Periods

Growing or recovering companies can sustain above average growth rates in the short term. Very high growth rates tend to be unsustainable over long periods of time. Add several (declining) growth periods for a more realistic valuation.

Borders and Southern Petroleum Hints
3yr Avg. Cashflow Growth %
5yr Avg. Cashflow Growth %
Forecast Year 1 Earnings Growth %
Forecast Year 2 Earnings Growth %
Finally, the company should settle into a long term growth rate of %.
Terminal Growth

The terminal growth rate is the permanent state of growth that the company can achieve once it's fast growth period is over. Most companies will tend towards growing earnings in line with long term trends of inflation (around 3%). Truly great companies can sustain higher permanent growth rates.

Investors require a return of % for the risk they are taking.
Discount Rate

The Discount Rate can be thought of as the interest rate you demand for taking on the risk of owning the stock. The lower the discount rate the more confidence shown in future cashflows. Blue Chip discount rates should be 9-10%, Mid Caps 11-12% and small caps or volatile stocks 13-15%.




Description

DCF analysis tries to work out the value of a company today, based on projections of how much money it's going to make in the future. The use of the word "discounted" refers to the fact that cash in the future is worth less than cash today. As DCF is a mechanical valuation tool, this makes it subject to the principle of "garbage in, garbage out". In particular, small changes in inputs can result in large changes in the value of a company, given the need to project cash-flow to infinity. Nevertheless, it is very widely used as perhaps the primary valuation tool amongst the financial analyst community.



Breakdown

Year 0 1 2 3 4 5 6 7 8
Cashflows -43.3 -43.3 -43.3 -43.3 -43.3 -43.3 -43.3 -43.3 -43.3
Present Value of Cashflows 0.0 -37.7 -32.8 -28.5 -24.8 -21.5 -18.7 -16.3 -14.2

Sum of Present Value of Cashflows: -194.4
Perpetuity Value of Final Cashflow -121.6
Equity Value 0.00m
Implied Share Price p0.00
Discount/Premium to Current Price -100.00%


* Disclaimer: These valuation tools are provided solely for informational & educational purposes so that users can easily run their own valuations. The pre-defined values are simply a starting point based on global assumptions that we have applied across the entire market – users should amend them as they see fit and not regard them as a substitute for their own judgment. Any resulting valuation outputs are necessarily generic and are not endorsed for a given stock by Stockopedia.