Calculating The Fair Value Of AO World plc (LON:AO.)

In This Article:

Key Insights

  • The projected fair value for AO World is UK£1.24 based on 2 Stage Free Cash Flow to Equity

  • AO World's UK£1.09 share price indicates it is trading at similar levels as its fair value estimate

  • Our fair value estimate is 1.9% higher than AO World's analyst price target of UK£1.21

How far off is AO World plc (LON:AO.) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by projecting its future cash flows and then discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

See our latest analysis for AO World

What's The Estimated Valuation?

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) forecast

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

Levered FCF (£, Millions)

UK£30.9m

UK£35.4m

UK£45.2m

UK£43.3m

UK£42.3m

UK£41.9m

UK£41.8m

UK£42.0m

UK£42.4m

UK£43.0m

Growth Rate Estimate Source

Analyst x3

Analyst x6

Analyst x2

Est @ -4.11%

Est @ -2.30%

Est @ -1.03%

Est @ -0.14%

Est @ 0.48%

Est @ 0.91%

Est @ 1.22%

Present Value (£, Millions) Discounted @ 7.1%

UK£28.8

UK£30.8

UK£36.8

UK£32.9

UK£30.0

UK£27.7

UK£25.8

UK£24.2

UK£22.8

UK£21.6

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = UK£282m