Today we’re going to go over one way to estimate the intrinsic value of Terna Energy Societe Anonyme Commercial Technical Company (ATH: TENERGY) by projecting its future cash flows and then discounting them to today’s value. . This will be done using the Discounted Cash Flow (DCF) model. Before you think you won’t be able to figure it out, read on! It’s actually a lot less complex than you might imagine.
We generally think of a business’s value as the present value of all the cash it will generate in the future. However, a DCF is only one evaluation measure among many, and it is not without its flaws. For those who are passionate about equity analysis, the Simply Wall St analysis template here may be something of interest to you.
View our latest analysis for Terna Energy Societe Anonyme Commercial Technical
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 lower growth stage. To begin with, we need to get cash flow estimates for the next ten years. Where possible, we use analyst estimates, but when these are not available, we extrapolate the previous free cash flow (FCF) from the last estimate or stated value. 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.
In general, we assume that a dollar today is worth more than a dollar in the future, so we discount the value of those future cash flows to their estimated value in today’s dollars:
10-year Free Cash Flow (FCF) estimate
|Leverage FCF (€, Millions)||– € 226.0m||143.0 million euros||€ 153.6m||163.1 M €||171.8 M €||€ 179.9m||€ 187.6m||195.1 M €||202.5 million euros||€ 209.9m|
|Source of estimated growth rate||Analyst x1||Analyst x1||Est @ 7.43%||Is 6.19%||East @ 5.32%||East @ 4.72%||East @ 4.29%||Is @ 3.99%||East @ 3.79%||East @ 3.64%|
|Present value (€, Millions) discounted at 9.2%||-207 €||€ 120||118 €||€ 115||€ 111||€ 106||€ 101||€ 96.4||€ 91.6||€ 86.9|
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = 738 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. For a number of reasons, a very conservative growth rate is used that cannot exceed that of a country’s GDP growth. In this case, we used the 5-year average of the 10-year government bond yield (3.3%) to estimate future growth. Similar to the 10-year “growth” period, we discount future cash flows to their present value, using a cost of equity of 9.2%.
Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = € 210m × (1 + 3.3%) ÷ (9.2% – 3.3%) = € 3.7bn
Present value of terminal value (PVTV)= TV / (1 + r)ten= € 3.7bn ÷ (1 + 9.2%)ten= € 1.5bn
The total value, or equity value, is then the sum of the present value of future cash flows, which in this case is € 2.3 billion. In the last step, we divide the equity value by the number of shares outstanding. Compared to the current share price of € 13.0, the company looks fairly good value with a 33% discount to the current share price. The assumptions in any calculation have a big impact on the valuation, so it’s best to take this as a rough estimate, not precise down to the last penny.
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. You don’t have to agree with these entries, I recommend that you redo the calculations yourself and play around with them. 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 consider Terna Energy Societe Anonyme Commercial Technical as a potential shareholder, 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 9.2%, which is based on a leverage beta of 0.800. 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.
Move on :
Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn’t be the only metric you look at when researching a business. DCF models are not the ultimate solution for investment valuation. Preferably, you would apply different cases and assumptions and see their impact on the valuation of the business. For example, changes in the company’s cost of equity or the risk-free rate can have a significant impact on valuation. What is the reason why the stock price is below intrinsic value? For Terna Energy Societe Anonyme Commercial Technical, we have put together three relevant things that you should consider:
- Risks: For example, we discovered 1 warning sign for Terna Energy Societe Anonyme Commercial Technical which you should know before investing here.
- Future benefits: How does TENERGY’s growth rate compare to that of its peers and the broader market? Dig deeper into the analyst consensus number for years to come by interacting with our free analyst growth expectations chart.
- 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!
PS. Simply Wall St updates its DCF calculation for every Greek stock every day, so if you want to find the intrinsic value of another stock just search here.
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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 any stock 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 documents. Simply Wall St has no position in any of the stocks mentioned.