Estimating The Truthful Worth Of Ten Leisure Group plc (LON:TEG)

Today we are going to provide a method of estimating the intrinsic value of Ten Entertainment Group plc (LON: TEG) by discounting the expected future cash flows to their present value. One way to achieve this is to use the discounted cash flow (DCF) model. Believe it or not, it’s not too difficult to follow as you will see from our example!

We point out that there are many ways to evaluate a company and that each method such as DCF has advantages and disadvantages in certain scenarios. If you want to learn more about the intrinsic value, you should get the Simply Wall St analytical model.

Check out our latest analysis for Ten Entertainment Group

Is the Ten Entertainment Group rated fairly?

We use the 2-step growth model, which simply means that we consider two phases of growth for the company. In the initial phase the company can show a higher growth rate and in the second phase a stable growth rate is normally assumed. In the first phase, we need to estimate the cash flows for the business over the next ten years. We use analyst estimates whenever possible, but when these are not available we extrapolate the previous free cash flow (FCF) from the most recent estimate or reported value. We assume that companies with falling free cash flow will slow their rate of contraction and that companies with increasing free cash flow will slow their growth rate over this period. We do this to take into account that growth tends to slow down more in the first few years than in later years.

In general, we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today’s dollars:

Free cash flow (FCF) estimate for 10 years











Levered FCF (£ million)

– UK £ 7.70m

UK £ 15.6m

£ 16.2 million

£ 16.6 million

Great Britain 16.9 million £

Great Britain £ 17.2m

Great Britain £ 17.5m

Great Britain £ 17.7m

£ 17.9m

Great Britain £ 18.1m

Source of growth rate estimate

Analyst x3

Analyst x5

Analyst x2

Estimated at 2.57%

Estimated @ 2.08%

Estimated @ 1.73%

Estimate @ 1.49%

Estimated @ 1.32%

East @ 1.2%

Estimated @ 1.11%

Present value (£, million) discounted by 12%

– UK £ 6.9

UK £ 12.5

UK £ 11.6

UK £ 10.7

UK £ 9.8

UK £ 8.9

UK £ 8.1

UK £ 7.4

UK £ 6.7

UK £ 6.1

(“Est” = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = £ 75 million

The story goes on

After calculating the present value of future cash flows in the first 10 year period, we need to calculate the terminal value that takes into account all future cash flows beyond the first tier. The Gordon growth formula is used to calculate the terminal value using a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 0.9%. We discount the terminal cash flows to today’s value using a cost of equity rate of 12%.

Final value (TV)= FCF2030 × (1 + g) ÷ (r – g) = UK £ 18m × (1 + 0.9%) ÷ (12% -0.9%) = UK £ 172m

Present value of the final value (PVTV)= TV / (1 + r) 10 = UK £ 172m ÷ (1 + 12%) 10 = UK £ 58m

The total value or equity value is then the sum of the present value of future cash flows which in this case is £ 133 million. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Based on the current share price of 2.3 pounds sterling, the company appears at fair value at the time of writing. Ratings, however, are inaccurate instruments, much like a telescope – move a few degrees and land in a different galaxy. Keep this in mind.


The assumptions

The above calculation depends heavily on two assumptions. The first is the discount rate and the other is the cash flows. You don’t have to agree to these inputs, I recommend repeating the calculations yourself and playing with them. The DCF also does not take into account the possible cyclical nature of an industry or the future capital requirements of a company, so that it does not provide a complete picture of a company’s potential performance. Since we consider Ten Entertainment Group to be 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) which accounts for debt. In this calculation we used 12% which is based on a leveraged beta of 2,000. Beta is a measure of the volatility of a stock compared to the overall market. We get our beta from the industry average beta of globally comparable companies with an imposed limit between 0.8 and 2.0, which is a reasonable range for stable business.

Looking ahead:

Assessment is only one side of the coin in terms of creating your investment thesis and ideally not the only analysis you research for a company. A foolproof valuation is not possible with a DCF model. Instead, the best use for a DCF model is to test certain assumptions and theories to see if they would lead to an under- or over-valuation of the company. If a company is growing differently, or if the cost of equity or the risk-free interest rate changes dramatically, the outcome may be very different. For Ten Entertainment Group, there are three key aspects that you should investigate further:

  1. Risks: You should be aware of this 1 warning sign for Ten Entertainment Group We uncovered before we even consider investing in the company.

  2. Future income: What is TEG’s growth rate compared to competitors and the broader market? Delve deeper into analyst consensus numbers for the years to come by using our free analyst growth expectations chart.

  3. Other high quality alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of ​​what else you might be missing out on!

PS. The Simply Wall St app performs a discounted cash flow assessment for every share on the LSE on a daily basis. If you want to easily find the calculation for other stocks Search here.

This article from Simply Wall St is of a general nature. It is not a recommendation to buy or sell stocks and does not take into account your goals or your financial situation. Our goal is to provide you with long-term, focused analysis based on fundamentals. Note that our analysis may not take into account the latest company announcements or quality material, which is sensitive to the price. Simply Wall St has no position in the stocks mentioned.

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