Key Insights

Games Workshop Group's estimated fair value is UK£106 based on 2 Stage Free Cash Flow to Equity Games Workshop Group's UK£143 share price signals that it might be 35% overvalued The UK£138 analyst price target for GAW is 30% more than our estimate of fair value

In this article we are going to estimate the intrinsic value of Games Workshop Group PLC (LON:GAW) by taking the expected future cash flows and discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Believe it or not, it's not too difficult to follow, as you'll see from our example!

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

Check out our latest analysis for Games Workshop Group

What's The Estimated Valuation?

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To begin with, we have to get estimates of 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.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) estimate

2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 Levered FCF (£, Millions)  UK£156.9m UK£155.1m UK£171.0m UK£174.7m UK£178.5m UK£182.3m UK£186.2m UK£190.2m UK£194.3m UK£198.4m Growth Rate Estimate Source Analyst x2 Analyst x2 Analyst x2 Est @ 2.20% Est @ 2.17% Est @ 2.15% Est @ 2.14% Est @ 2.13% Est @ 2.12% Est @ 2.12% Present Value (£, Millions) Discounted @ 6.8%  UK£147 UK£136 UK£140 UK£134 UK£129 UK£123 UK£118 UK£112 UK£108 UK£103

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = UK£1.2b

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.1%. We discount the terminal cash flows to today's value at a cost of equity of 6.8%.

Story Continues

Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = UK£198m× (1 + 2.1%) ÷ (6.8%– 2.1%) = UK£4.3b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= UK£4.3b÷ ( 1 + 6.8%)10= UK£2.2b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is UK£3.5b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of UK£143, the company appears reasonably expensive at the time of writing. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.LSE:GAW Discounted Cash Flow February 8th 2025

The Assumptions

We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Games Workshop Group as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 6.8%, which is based on a levered beta of 0.964. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

SWOT Analysis for Games Workshop Group

Strength

Earnings growth over the past year exceeded its 5-year average.

Currently debt free.

Weakness

Earnings growth over the past year underperformed the Leisure industry.

Dividend is low compared to the top 25% of dividend payers in the Leisure market.

Expensive based on P/E ratio and estimated fair value.

Opportunity

Annual revenue is forecast to grow faster than the British market.

Threat

Dividends are not covered by cash flow.

Annual earnings are forecast to grow slower than the British market.

Looking Ahead:

Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. What is the reason for the share price exceeding the intrinsic value? For Games Workshop Group, we've compiled three additional items you should consider:

Risks: For example, we've discovered 1 warning sign for Games Workshop Group that you should be aware of before investing here. Future Earnings: How does GAW's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart. Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the LSE every day. If you want to find the calculation for other stocks just search here.

Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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