Yeah I think we take slightly different approaches but end up roughly at the same place. Really refreshing for me to know I haven't gone completely bonkers in some of my reasoning!
"Sure, if those investments pay off, then the Company is trading at a very cheap multiple of its present underlying cash generation (as measured above).The downside is that, if they don’t pay off and revenue does not stabilise, then the future FCF yield (i.e. the one that will actually translate into surplus capital) may be a lot lower. Plus, if Net Debt does not get further reduced while this investment phase goes on, while revenues keep declining, then [Net Debt]/EBITDA will also deteriorate accordingly."
Ain't that the truth. Projecting exactly how well the current investment in the business will turn out and what future earnings might look like is impossible in my view. If it all goes as well as Martin hopes then future earnings could dwarf anything the company has done in the past. On the other end of the spectrum, the company could invest significant sums of shareholder funds yet the business' goose could still be cooked anyway, so to speak.
Like most things, the reality will probably be somewhere in the middle - I think the company will hold its ground.
As Buffett has pointed out many times, the value of a business is equal to the amount of cash it generates (discounted at an appropriate level) for the rest of its life. Fortunately, in cases such as these, I don't have to be able to predict future cashflows in order to get a sense of business value.
I can do a reverse DCF to get a sense of what would need to happen to the business (from where it is today) in order for the current market capitilisation to make sense.
I have used a discount rate of 2% (I think 10 year government bonds - which is what I like to use for my 'risk free' rate - is actually 1.4% at the moment, but let's be conservative).
From where we are today, underlying earnings would need to drop by 35% a year, ever year for the next eleven years. The business would have to be so worthless in 2030 that nobody would pay anything for what was left of it if we tried to sell it.
If that happened (see table below) then sure, the current market capitilisation makes absolute sense.
Do I think that is a plausible scenario? Absolutely not.
| Calendar Year | Owner Earnings | Discounted Earnings |
|---|
| 1 | 2020 | $100,000,000.00 | $98,039,215.69 |
|---|
| 2 | 2021 | $65,000000.00 | $63,725,490.20 |
|---|
| 3 | 2022 | $42,250,000.00 | $40,609,381,01 |
|---|
| 4 | 2023 | $27,462,500.00 | $25,878,527.11 |
|---|
| 5 | 2024 | $17,850.625.00 | $16,491,218.26 |
|---|
| 6 | 2025 | $11,602,906.25 | $10,509,109.67 |
|---|
| 7 | 2026 | $7,541,889.06 | $6,696,981.66 |
|---|
| 8 | 2027 | $4,902,227.89 | $4,267,684.39 |
|---|
| 9 | 2028 | $3,186,448.13 | $2,718,602.80 |
|---|
| 10 | 2029 | $2,071,191.28 | $1,733,080.21 |
|---|
| 11 | 2030 | $1,346,274.33 | $1,104,413.86 |
|---|
| 12 | Sell Business | $0.00 | $0.00 |
|---|
| 13 | TOTAL | $283,214,061.95 | $271,774,704.85 |
|---|
| 14 | Value Per share |
| 0.61 |
|---|
(20min delay)