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Sirius Real Estate Limited
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== Valuation== ===What's the expected return of an investment in the company?=== Stockhub estimates that the expected return of an investment in the company over the next five years is negative xxx%. In other words, an Β£1,000 investment in the company is expected to return Β£xxx in five years time. The assumptions used to estimate the return figure can be found in the table below. Assuming that a suitable return level over five years is 10% per year and Sirius Real Estate Limited achieves its expected return level (of negative xxx%), then an investment in the company is considered to be an 'xxx' one. ===What are the assumptions used to estimate the return?=== {| class="wikitable" |+Key inputs !Description !Value !Commentary |- |Which valuation model do you want to use? |Discounted cash flow |Research suggests that in terms of estimating the expected return of an investment over a period of 12-months or more, the approach that is more accurate is the discounted cash flow approach, so that's the approach that we suggest to use here; nevertheless, for completeness purposes, separately, the valuation of the company is also estimated using the using the relative valuation approach (the valuation based on the relative approach can be found in the appendix of this report). |- |Which type of DCF model do you want to use? |Free cash flow |While Sirius has paid a dividend every year since the company's incorporation (in 2002), at the moment, the growth rate of the dividend varies materially; accordingly, we suggest valuing the business using the free cash flow valuation approach (rather than the dividend discount model approach). Nevertheless, for completeness purposes, separately, the valuation of the company is also estimated using the dividend discount model (the valuation based on the dividend discount model can be found in the appendix of this report). |- |How many distinct stage of growth do you want to use? |One stage |For simplicity, here, we have used one stage, in particular the Gordon growth model (GGM). |- |What is the expected lifespan of the business? |Perpetual |Again, for simplicity, we have assumed that the business continues forever. |- |What is the expected constant growth rate in free cash flow? |4% |Research shows that there's a correlation between GDP growth and the free cash flow (FCF) growth of Real Estate Investment Trusts (REITs), such as Sirius. We note that the gross domestic product (GDP) growth rate in the last 20 years (2001 to 2022) is around 3% per year for the global economy, and around 2.25% for the United Kingdom and 1.95% for Germany. Given that Sirius is leveraged and the size of the leverage, we expect the FCF growth of the business to be much more than the GDP growth of the two countries in which the company operates (i.e. the United Kingdom and Germany). |- |Which financial forecasts to use? |Proactive Investors. |Here, we have used our own forecast. To calculate the company's two year ahead free cash flow forecast figure (i.e. the relevant forecast figure for our model), we multiplied the (median) average free cash flow figure of the company's most recent three years (i.e. historic forecasts) by our estimated constant free cash flow growth rate. |- |What is the required return on equity? |12.24% |For estimating the required return on equity, we used the Capital Asset Pricing Model (CAPM), which provides an economically grounded and relatively objective procedure for required return estimation, and, therefore, it has been widely used in valuation. The calculation of the required return on equity (and the reasons behind the calculation) can be found in the table below. |- |What is the euros to pounds foreign exchange conversion rate? |0.89 |For simplicity, we have used the rate as of today (1:0.89). |- |What's the current value of the company? |88.10 pence per share |As at 16th February 2023, the current value of Sirius is 88.10p per share. |- |Which time period do you want to use to estimate the expected return? |Between now and five years time |Research suggests that following a market crash, the average amount of time it takes for the price of a stock market to return to its pre-crash level (i.e. the recovery period) is at least three years. Accordingly, we suggest that to account for general market cyclicity, it's best to estimate the expected return of the company between now and five years time. |} ===Sensitivity analysis=== The main inputs that result in the greatest change in the expected return of the Sirius Real Estate Limited investment are, in order of importance (from highest to lowest): # The Year-two forward FFO forecast (the default forecast is $xxx million); # The constant growth rate in free cash flow (the default forecast is ccc%); and # The required return on equity (the default forecast is 12.24%). The impact of a 10% change in those main inputs to the expected return of the Sirius Real Estate Limited investment is shown in the table below. {| class="wikitable sortable" |+Sirius investment expected return sensitive analysis !Main input !10% worse !Unchanged !10% better |- |The size of the total addressable market | | | |- |Sirius Real Estate Limited peak market share | | | |- |The discount rate | | | |}
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