What is FGP.L's Intrinsic value?

FirstGroup PLC (FGP.L) Intrinsic Value Analysis

Executive Summary

As of June 10, 2025, FirstGroup PLC's estimated intrinsic value ranges from $189.44 to $3075.21 per share, depending on the valuation methodology applied.

Valuation Method Fair Value (USD) Implied Upside/Downside
Discounted Cash Flow (5Y) $216.02 +10.8%
Dividend Discount Model (Stable) $189.44 -2.8%
Earnings Power Value $3075.21 +1477.8%

Is FirstGroup PLC (FGP.L) undervalued or overvalued?

With the current market price at $194.90, the stock appears to be significantly undervalued.

Understanding Intrinsic Value

Intrinsic value represents the "true" worth of a company based on its fundamentals rather than market sentiment. We've employed multiple methodologies to triangulate FirstGroup PLC's intrinsic value, including:

  1. Discounted Cash Flow (DCF): Values the company based on projected future cash flows
  2. Dividend Discount Model (DDM): Values the company based on expected future dividend payments
  3. Earnings Power Value (EPV): Values the company based on its current earnings power, assuming no growth

Weighted Average Cost of Capital (WACC)

The cost of capital is a critical factor in valuation models, representing the required return for investors.

WACC Component Low High
Long-term bond rate 4.0% 4.5%
Equity market risk premium 6.0% 7.0%
Adjusted beta 0.8 1.03
Cost of equity 8.8% 12.2%
Cost of debt 4.3% 5.5%
Tax rate 17.3% 39.9%
Debt/Equity ratio 1.54 1.54
After-tax WACC 5.6% 6.8%

Valuation Methods

1. Discounted Cash Flow (DCF) Valuation

Our DCF model projects cash flows over 5-year and 10-year horizons, with the following key assumptions:

  • Forecast Period: 5-year DCF
  • Terminal Growth Rate: 0.0% (range: 3.0% - 5.0%)
  • Discount Rate: 6.2% (range: 0.0% - 9.3%)

Key Projections:

  • Revenue growth from $4,715 (FY03-2024) to $3,367 (FY03-2034)
  • Net profit margin expansion from 0% to 0%
  • Capital expenditures maintained at approximately 6% of revenue
DCF Model Fair Value Enterprise Value % from Terminal Value
5-Year Growth $216 $2,164M 82.4%
10-Year Growth $(1,234) $694M 35.5%
5-Year EBITDA $42 $1,210M 68.4%
10-Year EBITDA $5 $1,007M 55.6%

2. Dividend Discount Model (DDM)

The DDM values a company based on its expected future dividend payments. We used two approaches:

Multi-Stage DDM:

  • Current payout ratio: 35.6%
  • Stable payout ratio: 90.0%
  • Growth transition: 5 years
  • Cost of equity: 10.5%
  • Long-term growth rate: 2.0%
  • Fair value: $-14.27 (-107.3% from current price)

Stable DDM:

  • Stable payout ratio: 70% (Low) to 90% (High)
  • Cost of equity: 12.2% (Low) to 8.8% (High)
  • Long-term growth rate: 1.0% (Low) to 3.0% (High)
  • Fair value range: $108 to $271
  • Selected fair value: $189.44 (-2.8% from current price)

3. Earnings Power Value (EPV)

EPV assesses a company's value based on its current normalized earnings power, assuming no growth.

EPV Component Value
Normalized Earnings $1,095M
Discount Rate (WACC) 6.8% - 5.6%
Enterprise Value $16,126M - $19,624M
Net Debt $977M
Equity Value $15,149M - $18,647M
Outstanding Shares 5M
Fair Value $2,757 - $3,394
Selected Fair Value $3075.21

Key Financial Metrics

Metric Value
Market Capitalization $1071M
Enterprise Value $2048M
Trailing P/E 11.27
Forward P/E 11.27
Trailing EV/EBITDA 4.45
Current Dividend Yield 315.61%
Dividend Growth Rate (5Y) -23.91%
Debt-to-Equity Ratio 1.54

Investment Decision Framework

To determine the most reliable intrinsic value estimate, we weigh each valuation method based on:

  1. Forecast Certainty: DCF methods rely on long-term projections, while earnings power value focuses on current normalized earnings
  2. Business Model Alignment: Dividend models are more appropriate for mature companies with established dividend policies
  3. Historical Accuracy: How well each method has predicted fair value historically

Valuation Weight Matrix

Valuation Method Weight Weighted Value
Discounted Cash Flow (5Y) 50% $54.00
Dividend Discount Model (Stable) 30% $28.42
Earnings Power Value 20% $307.52
Weighted Average 100% $779.88

Investment Conclusion

Based on our comprehensive valuation analysis, FirstGroup PLC's weighted average intrinsic value is $779.88, which is approximately 300.1% above the current market price of $194.90.

Key investment considerations:

  • Strong projected earnings growth (0% to 0% margin)
  • Consistent cash flow generation

Given these factors, we believe FirstGroup PLC is currently significantly undervalued with the potential for long-term appreciation based on the company's growth trajectory and financial strength.