Is Capricorn Energy PLC (LON:CNE) Trading At A 28% Discount?

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17-05-2025

Capricorn Energy's estimated fair value is UK£2.98 based on 2 Stage Free Cash Flow to Equity
Current share price of UK£2.16 suggests Capricorn Energy is potentially 28% undervalued
Our fair value estimate is 17% higher than Capricorn Energy's analyst price target of US$2.55
Today we will run through one way of estimating the intrinsic value of Capricorn Energy PLC (LON:CNE) by taking the expected future cash flows and discounting them to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. There's really not all that much to it, even though it might appear quite complex.
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.
We've discovered 3 warning signs about Capricorn Energy. View them for free.
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF ($, Millions)
-US$13.1m
US$39.7m
US$27.6m
US$21.4m
US$18.2m
US$16.4m
US$15.4m
US$14.9m
US$14.6m
US$14.5m
Growth Rate Estimate Source
Analyst x2
Analyst x3
Analyst x3
Est @ -22.41%
Est @ -14.99%
Est @ -9.81%
Est @ -6.17%
Est @ -3.63%
Est @ -1.85%
Est @ -0.61%
Present Value ($, Millions) Discounted @ 7.2%
-US$12.3
US$34.6
US$22.5
US$16.3
US$12.9
US$10.9
US$9.5
US$8.6
US$7.8
US$7.3
("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = US$118m
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 2.3%. We discount the terminal cash flows to today's value at a cost of equity of 7.2%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = US$15m× (1 + 2.3%) ÷ (7.2%– 2.3%) = US$306m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$306m÷ ( 1 + 7.2%)10= US$153m
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$271m. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of UK£2.2, the company appears a touch undervalued at a 28% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Capricorn Energy 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 7.2%, which is based on a levered beta of 0.946. 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 Capricorn Energy
Strength
Debt is not viewed as a risk.
Dividend is in the top 25% of dividend payers in the market.
Weakness
No major weaknesses identified for CNE.
Opportunity
Has sufficient cash runway for more than 3 years based on current free cash flows.
Good value based on P/S ratio and estimated fair value.
Threat
Not expected to become profitable over the next 3 years.
Whilst important, the DCF calculation 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?" 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 sitting below the intrinsic value? For Capricorn Energy, there are three essential elements you should explore:
Risks: For instance, we've identified 3 warning signs for Capricorn Energy (1 is concerning) you should be aware of.
Future Earnings: How does CNE'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 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.