What is STEM.L's Intrinsic value?

SThree PLC (STEM.L) Intrinsic Value Analysis

Executive Summary

As of May 22, 2025, SThree PLC's estimated intrinsic value ranges from $280.98 to $651.84 per share, depending on the valuation methodology applied.

Valuation Method Fair Value (USD) Implied Upside/Downside
Discounted Cash Flow (10Y) $398.26 +72.8%
Discounted Cash Flow (5Y) $393.70 +70.8%
Dividend Discount Model (Multi-Stage) $280.98 +21.9%
Dividend Discount Model (Stable) $328.38 +42.5%
Earnings Power Value $651.84 +182.8%

Is SThree PLC (STEM.L) undervalued or overvalued?

With the current market price at $230.50, 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 SThree 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 0.84 1.08
Cost of equity 9.0% 12.5%
Cost of debt 4.0% 4.6%
Tax rate 29.0% 29.7%
Debt/Equity ratio 0.13 0.13
After-tax WACC 8.3% 11.4%

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 and 10-year DCF
  • Terminal Growth Rate: 0.0% (range: 3.0% - 5.0%)
  • Discount Rate: 9.8% (range: 0.0% - 9.3%)

Key Projections:

  • Revenue growth from $1,493 (FY11-2024) to $1,957 (FY11-2034)
  • Net profit margin expansion from 3% to 3%
  • Capital expenditures maintained at approximately 0% of revenue
DCF Model Fair Value Enterprise Value % from Terminal Value
5-Year Growth $394 $472M 59.4%
10-Year Growth $398 $478M 38.2%
5-Year EBITDA $343 $408M 52.9%
10-Year EBITDA $384 $460M 35.7%

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: 31.9%
  • Stable payout ratio: 90.0%
  • Growth transition: 5 years
  • Cost of equity: 10.7%
  • Long-term growth rate: 0.5%
  • Fair value: $280.98 (21.9% from current price)

Stable DDM:

  • Stable payout ratio: 70% (Low) to 90% (High)
  • Cost of equity: 12.5% (Low) to 9.0% (High)
  • Long-term growth rate: 0.0% (Low) to 1.0% (High)
  • Fair value range: $218 to $439
  • Selected fair value: $328.38 (42.5% 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 $77M
Discount Rate (WACC) 11.4% - 8.3%
Enterprise Value $674M - $930M
Net Debt $(30)M
Equity Value $704M - $959M
Outstanding Shares 1M
Fair Value $552 - $752
Selected Fair Value $651.84

Key Financial Metrics

Metric Value
Market Capitalization $294M
Enterprise Value $264M
Trailing P/E 5.92
Forward P/E 6.51
Trailing EV/EBITDA 4.50
Current Dividend Yield 532.44%
Dividend Growth Rate (5Y) 24.23%
Debt-to-Equity Ratio 0.13

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 (10Y) 30% $119.48
Discounted Cash Flow (5Y) 25% $98.43
Dividend Discount Model (Multi-Stage) 20% $56.20
Dividend Discount Model (Stable) 15% $49.26
Earnings Power Value 10% $65.18
Weighted Average 100% $388.54

Investment Conclusion

Based on our comprehensive valuation analysis, SThree PLC's weighted average intrinsic value is $388.54, which is approximately 68.6% above the current market price of $230.50.

Key investment considerations:

  • Strong projected earnings growth (3% to 3% margin)
  • Consistent cash flow generation
  • Conservative capital structure (Debt/Equity of 0.13)
  • Historical dividend growth of 24.23%

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