## \$SAL.L – SpaceandPeople – a valuation

BLUF: Estimated value: £30m. Market cap: £9.9m based on a share price of 51p.

The share price of SAL (SpaceandPeople) continues to drift lower, and has flatlined, with a downward drift, since its profit warning in April 2014. I have estimated that its equity is worth around £30m using a two-phase growth model.

Here is the Fortran program that does the calculation:

```PROGRAM mmm
! calcs at 05-Sep-2014
b0 = 2279 ! operating profit y/e 31-Dec-2014
taxr = 0.21 ! http://www.hmrc.gov.uk/rates/corp.htm
a0 = b0 * (1.0 - taxr)
theta1 = 1.0 - 1.0/2.04 ! retention rate
g1 = 0.227 * theta1 ! ROCE * retention rate
h1 = 0.1 ! just use Aswath's Twitter Aug-2014 valuation

r = (1+g1)/(1+h1)
p1 = a0 * (1- theta1) * r * (1- r**5) / (1-r)
print *, "p1 = ", p1

gt = 0.025 ! per Aswath, again
ct = 0.08
pt0 = a0 * r ** 5 * (1 + gt) /ct
print *, "pt0 = ", pt0
voa = p1 + pt0
print *, "voa = ", voa
cash = 1883 ! actually net cash
cross = 0.0
debt = 0.0
voo = 0.0
voe = voa + cash + cross - debt-voo
print *, "voe = ", voe ! value of equity
end program```

There’s nothing complicated there. The source code is also in my github aswath repo; which is freely available. You may be interested to know that there is an online Fortran compiler and executer. How cool is that? You can copy and paste the code into the source area, tweak it as you wish.

The growth phase starts with a base operating profit of £2279k. Using figures mostly from Stockopedia, I use a ROCE of 22.7%. Dividend cover is 2.04, go it is retaining around 50% of its earnings, so growth should be at about 10% pa. The cost of capital to the firm can be a whole calculation exercise in itself, as it has many moving parts. You would need betas, equity risk premiums, and adjust for leverage (because the model uses a firm valuation, rather than starting from an equity one). I just used 10%, which is what Aswath seems to end up mostly in his cost of capital calcs anyway. I’m being a little sloppy, it’s true, but I’m using that figure anyway.

In the terminal phase, growth is more moderate, where I have used a risk-free rate of 2.5%, and a cost of capital of 8%. SAL has net cash of £1883k.

When you tie all those figures together, you end up with a valuation of £39m. There is a lot of implied upside in this valuation. The valuation is, of course, only as good as the assumptions that go into it. As we saw in my recent valution of TSCO (Tesco), I changed my assumptions about its likely dividend stream, and that significantly changed my estimate of value.

Update 07-Sep-2014 : Corrected a mistake in the program, which lowers the estimated value of equity from £39m to £30m. A0 is after-tax operating profits, not before-tax.