In this article, we will estimate the intrinsic value of Proodeftiki SA (ATH: PRD) by taking expected future cash flows and discounting them to their present value. To this end, we will take advantage of the Discounted Cash Flow (DCF) model. There really isn’t much to do, although it might seem quite complex.
Keep in mind, however, that there are many ways to estimate the value of a business, and a DCF is just one method. If you want to know more about discounted cash flows, the rationale for this calculation can be read in detail in the Simply Wall St analysis model.
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The method
We use what is called a two-step model, which simply means that we have two different periods of growth rate for the cash flow of the business. Usually, the first stage is higher growth, and the second stage is a lower growth stage. To begin with, we need to estimate the next ten years of cash flow. Since no free cash flow analyst estimate is available, we have extrapolated the previous free cash flow (FCF) from the last reported value of the company. We assume that companies with decreasing free cash flow will slow their rate of contraction, and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow down more in the early years than in subsequent years.
A DCF is based on the idea that a dollar in the future is worth less than a dollar today, so we discount the value of those future cash flows to their estimated value in today’s dollars. hui:
10-year Free Cash Flow (FCF) estimate
2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | |
Leverage FCF (€, Millions) | € 1.63 M | € 1.41m | 1.30 M € | € 1.23m | € 1.20m | 1.19 M € | € 1.20m | € 1.22m | € 1.24m | € 1.27m |
Source of estimated growth rate | East @ -20.52% | Is @ -13.38% | Is @ -8.37% | Is @ -4.87% | East @ -2.42% | East @ -0.7% | Is @ 0.5% | East @ 1.34% | East @ 1.93% | East @ 2.34% |
Present value (€, Millions) discounted @ 16% | € 1.4 | 1.1 € | € 0.8 | € 0.7 | € 0.6 | € 0.5 | € 0.4 | € 0.4 | € 0.3 | € 0.3 |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = 6.0 M €
After calculating the present value of future cash flows over the initial 10 year period, we need to calculate the terminal value, which takes into account all future cash flows beyond the first step. The Gordon growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 3.3%. We discount terminal cash flows to their present value at a cost of equity of 16%.
Terminal value (TV)= FCF_{2031} × (1 + g) ÷ (r – g) = € 1.3m × (1 + 3.3%) ÷ (16% – 3.3%) = € 10m
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= € 10m ÷ (1 + 16%)^{ten}= 2.4 M €
The total value is the sum of the cash flows for the next ten years plus the present terminal value, which gives the Total Equity Value, which in this case is € 8.4m. In the last step, we divide the equity value by the number of shares outstanding. Compared to the current price of € 0.3, the company appears at its fair value with a discount of 12% compared to the current share price. Remember, however, that this is only a rough estimate, and like any complex formula – trash in, trash out.
Important assumptions
We draw your attention to the fact that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. Part of investing is coming up with your own assessment of a company’s future performance, so try the math yourself and check your own assumptions. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a full picture of a company’s potential performance. Since we view Proodeftiki 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 takes debt into account. In this calculation, we used 16%, which is based on a leveraged beta of 1.687. Beta is a measure of the volatility of a stock relative to the market as a whole. We get our beta from the industry average beta of comparable companies globally, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
Next steps:
While important, calculating DCF ideally won’t be the only piece of analysis you’ll look at for a business. DCF models are not the ultimate solution for investment valuation. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to undervaluation or overvaluation of the company. For example, changes in the company’s cost of equity or the risk-free rate can have a significant impact on valuation. For Proodeftiki, you need to take into account three fundamental factors:
- Risks: For example, we discovered 4 warning signs for Proodeftiki (3 make us uncomfortable!) Which you should be aware of before investing here.
- Other strong companies: 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 trading fundamentals to see if there are other companies you may not have considered!
- Other picks from top analysts: Interested in seeing what analysts think? Take a look at our interactive list of analysts’ top stock picks to find out what they think might have a compelling outlook for the future!
PS. The Simply Wall St app performs a daily discounted cash flow assessment for each ATSE share. If you want to find the calculation for other actions, just search here.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.
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