Key Insights

Mitie Group's estimated fair value is UK£2.65 based on 2 Stage Free Cash Flow to Equity Mitie Group is estimated to be 45% undervalued based on current share price of UK£1.46 The UK£1.74 analyst price target for MTO is 34% less than our estimate of fair value

In this article we are going to estimate the intrinsic value of Mitie Group plc (LON:MTO) by projecting its future cash flows and then discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.

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 want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

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Is Mitie Group Fairly Valued?

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. In the first stage we need to estimate the cash flows to the business over the next ten years. 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) estimate

2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Levered FCF (£, Millions)  UK£121.8m UK£153.0m UK£178.5m UK£179.5m UK£181.6m UK£184.7m UK£188.3m UK£192.5m UK£197.1m UK£202.0m Growth Rate Estimate Source Analyst x5 Analyst x5 Analyst x5 Est @ 0.55% Est @ 1.20% Est @ 1.66% Est @ 1.99% Est @ 2.21% Est @ 2.37% Est @ 2.48% Present Value (£, Millions) Discounted @ 7.3%  UK£113 UK£133 UK£145 UK£135 UK£128 UK£121 UK£115 UK£110 UK£105 UK£99.9

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

繼續閱讀

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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 2.7%. We discount the terminal cash flows to today's value at a cost of equity of 7.3%.

Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = UK£202m× (1 + 2.7%) ÷ (7.3%– 2.7%) = UK£4.6b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= UK£4.6b÷ ( 1 + 7.3%)10= UK£2.3b

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£1.5, the company appears quite undervalued at a 45% discount to where the stock price trades currently. 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:MTO Discounted Cash Flow August 13th 2025

Important Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the 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 Mitie 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 7.3%, which is based on a levered beta of 0.892. 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.

See our latest analysis for Mitie Group

SWOT Analysis for Mitie Group

Strength

Debt is not viewed as a risk.

Dividends are covered by earnings and cash flows.

Weakness

Earnings declined over the past year.

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

Opportunity

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

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

Significant insider buying over the past 3 months.

Threat

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

Next Steps:

Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn't be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. What is the reason for the share price sitting below the intrinsic value? For Mitie Group, we've put together three relevant aspects you should consider:

Risks: You should be aware of the 1 warning sign for Mitie Group we've uncovered before considering an investment in the company. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for MTO's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

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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