Many thanks for posting your sums. 10/10 for effort!
Now allowed xlsx spreadsheets to be uploaded!
CLIG valuation 170620.xlsx (18.3 KB)
Here are some observations that you may or may not wish to consider. I should add that 20 years ago I dabbled with such long-term valuation calculations myself and I thought a lot about how they worked, the theories behind them and whether they actually worked in the real world (I’m not sure).
FCF is expected to advance from £8.9m to £15.9m between 2019 and 2029, or c6% a year.
For context, CLIG’s FuM has advanced from $4.38b to $5.4b between 2010 and 2019, so a CAGR of 2.4%.
True, different timescales will give different FuM CAGRs, but ultimately FCF growth cannot outrun FuM growth forever. So you have to consider how FUM is likely to move, too.
The sums indicate FCF bobs around £8-9m between 2020-2022, then starts to advance in a nice smooth manner until 2030. I think you have to ask what has to happen for FCF to advance so smoothly when the forecasts (and past results) suggest FCF tends to fluctuate.
Maybe you could get to FCF of £16.3m for 2030 through a variety of FCF ups and downs (e.g. +20%, -15%, -5%, +15% etc), which may present different values for NPV years 1-10.
Terminal value (TV):
TV is £217m / £16.3m or 13.3x FCF.
Market cap is £100m. 2019 FCF is £8.9m, so the present FCF multiple is 11.2x. So a slight re-rating takes place over the 10 years. Always worth asking whether such re-ratings are justified, or have happened in the past with the share.
TV represents 48% of the £158m estimated value. So a large chunk of the end result is based on this 13.3x multiple. Important that this 13.3x multiple is realistic. Helpful to check whether the shares have traded at 13.3x FCF in the past.
KAL says in his book that “in an ideal situation you want 100% of the present market cap to be represented by the existing business meaning that you are getting the prospect of the forward plan thrown in for free”.
You could therefore skip all the Y1-10 sums and place FCF on a multiple of 10 to get KAL’s ’10% annuity’ valuation. CLIG’s share price was I think close to a FCF multiple of 10x before the merger announcement. KAL’s theory would have said then that all of CLIG’s future growth would be ‘in for free’ — which sounds appealing.
Compound earnings model.
Retention ratio — I would use a longer history than the last three years. In years gone by, CLIG has paid out more than 100% of earnings as a dividend, and that could alter your retention ratio.
Also, I would include special dividends. I see them as cash that has built up and in effect could have been distributed as ordinary dividends during earlier years.
Plus, CLIG has a dividend cover target for 5-year periods of 1.2x, which is a retention ratio of 17%. So that will give a different result from a 28% ratio (I estimate an 11% compound return versus 15%).
ROE of 46% and a retention rate of 17% = c8% annual earnings growth. Again, you have to look back and consider whether that is realistic. As mentioned, FuM is up 2.4% CAGR between 2010-2019 and earnings can’t outrun FuM growth forever.
Similar to the DCF, the compound model gives a smooth trajectory for future earnings that, given CLIG’s past EPS ups and downs, may not be realistic.
Finally, always worth considering other shares in the sector. Most fund managers exhibit high margins, net cash etc, and yet are valued at 10-15x earnings. So perhaps the whole sector is under-appreciated, or perhaps the market recognises that the sector’s earnings can fluctuate with FuM and is not prepared to pay a high multiple. Other drawbacks, such as pressure on fee rates, may be at play too. A favourable industry-wide ‘structural shift’ that bolsters active fund-managers and their multiples seems unlikely, too.