RE: from ADVFN17 Feb 2020 11:54
Below are the data sources, inputs and calculation used to determine the intrinsic value for Indivior.
LSE:INDV Discounted Cash Flow Data Sources
Data Point Source Value
Valuation Model 2 Stage Free Cash Flow to Equity
Levered Free Cash Flow Average of 3 Analyst Estimates (S&P Global) See below
Discount Rate (Cost of Equity) See below 6.3%
Perpetual Growth Rate 10-Year GB Government Bond Rate 0.5%
An important part of a discounted cash flow is the discount rate, below we explain how it has been calculated.
Calculation of Discount Rate/ Cost of Equity for LSE:INDV
Data Point Calculation/ Source Result
Risk-Free Rate 10-Year GB Govt Bond Rate 0.5%
Equity Risk Premium S&P Global 5.4%
Pharmaceuticals Unlevered Beta Simply Wall St/ S&P Global 0.68
Re-levered Beta = 0.33 + [(0.66 * Unlevered beta) * (1 + (1 - tax rate) (Debt/Market Equity))]
= 0.33 + [(0.66 * 0.683) * (1 + (1 - 21.0%) (77.41%))] 1.068
Levered Beta Levered Beta limited to 0.8 to 2.0
(practical range for a stable firm) 1.068
Discount Rate/ Cost of Equity = Cost of Equity = Risk Free Rate + (Levered Beta * Equity Risk Premium)
= 0.53% + (1.068 * 5.44%) 6.34%
Discounted Cash Flow Calculation for LSE:INDV using 2 Stage Free Cash Flow to Equity Model
The calculations below outline how an intrinsic value for Indivior is arrived at by discounting future cash flows to their present value using the 2 stage method. We use analyst's estimates of cash flows going forward 5 years for the 1st stage, the 2nd stage assumes the company grows at a stable rate into perpetuity.
LSE:INDV DCF 1st Stage: Next 5 year cash flow forecast
Levered FCF (USD, Millions) Source Present Value
Discounted (@ 6.34%)
2020 -582.7 Analyst x1 -547.97
2021 91.3 Analyst x2 80.74
2022 184.5 Analyst x2 153.44
2023 324.5 Analyst x2 253.79
2024 510 Analyst x1 375.09
2025 656.52 Est @ 28.73% 454.07
2026 789.58 Est @ 20.27% 513.56
2027 902.87 Est @ 14.35% 552.24
2028 994.98 Est @ 10.2% 572.31
2029 1,067.62 Est @ 7.3% 577.49
Present value of next 5 years cash flows $2,984
LSE:INDV DCF 2nd Stage: Terminal Value
Calculation Result
Terminal Value FCF2029 × (1 + g) ÷ (Discount Rate – g)
= $1,067.619 x (1 + 0.53%) ÷ (6.34% - 0.53% ) $18,480.41
Present Value of Terminal Value = Terminal Value ÷ (1 + r)10
$18,480 ÷ (1 + 6.34%)10 $9,996.34
LSE:INDV Total Equity Value
Calculation Result
Total Equity Value = Present value of next 10 years cash flows + Terminal Value
= $2,984 + $9,996 $12,980.34
Equity Value per Share
(USD) = Total value / Shares Outstanding
= $12,980 / 732 $17.74
LSE:INDV Discount to Share Price
Calculation Result
Exchange Rate USD/GBP
(Reporting currency to currency of LSE:INDV) 0.768
Value per Share
(GBP) = Value per Share in USD x Exchange Rate (USD / GBP)
= $17.74 x 0.77 £13.62
Value per share (GBP) From above. £13.62
Current discount Discount to share price of £0.40
= -1 x (£0.40 - £13.62) / £13.62 97.1%
Learn more about our DCF calculations in Simply Wall