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Sirius Real Estate Limited
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==== DCF ==== 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. {| class="wikitable" |+ !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/most accurate is the absolute valuation approach, so that's the approach that we suggest using to determine the estimated value of the company. |- |Which type of discounted cash flow model do you want to use? |Dividend discount model |Given Sirius' UK REIT status, the company must pay at least 90% of its UK tax-exempt profits (being rental income after deducting finance costs, overheads and tax depreciation) to shareholders as dividends. Also as a German REIT (or G-REITs, for short), the company is required to distribute at least 90% of all income (i.e. rental income and non rental income, such as the income from the sale of properties). Furthermore, the company has stated that one of its policies is to pay out 65% or more of funds from operations (FFO) as dividends. Accordingly, we suggest using the dividend discount model (DDM), which is one of the most common discounted cash flow models. |- |How many distinct stage of growth do you want to use? |One stage |For simplicity, we have used one stage here. |- |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 dividends? |8% |Research shows that there's a correlation between GDP growth and the dividend 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 dividend 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 dividend forecast figure (i.e. the relevant forecast figure for our model), we multiplied the current dividend figure (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. |}
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