Calculating The Intrinsic Value Of WCM Beteiligungs- und Grundbesitz-AG (HMSE:WCMK)
Using the 2 Stage Free Cash Flow to Equity, WCM Beteiligungs- und Grundbesitz-AG fair value estimate is €2.24
Current share price of €1.86 suggests WCM Beteiligungs- und Grundbesitz-AG is potentially trading close to its fair value
Peers of WCM Beteiligungs- und Grundbesitz-AG are currently trading on average at a 135% premium
How far off is WCM Beteiligungs- und Grundbesitz-AG (HMSE:WCMK) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the forecast future cash flows of the company and discounting them back to today's value. This will be done using the Discounted Cash Flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
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We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To begin with, we have to get estimates of the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF (€, Millions)
€12.6m
€14.0m
€15.1m
€16.1m
€16.8m
€17.4m
€17.9m
€18.4m
€18.8m
€19.1m
Growth Rate Estimate Source
Est @ 15.52%
Est @ 11.25%
Est @ 8.25%
Est @ 6.16%
Est @ 4.69%
Est @ 3.67%
Est @ 2.95%
Est @ 2.44%
Est @ 2.09%
Est @ 1.85%
Present Value (€, Millions) Discounted @ 6.2%
€11.8
€12.4
€12.6
€12.6
€12.5
€12.2
€11.8
€11.4
€11.0
€10.5
("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = €119m
We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 have used the 5-year average of the 10-year government bond yield (1.3%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 6.2%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = €19m× (1 + 1.3%) ÷ (6.2%– 1.3%) = €396m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= €396m÷ ( 1 + 6.2%)10= €218m
The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is €337m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of €1.9, the company appears about fair value at a 17% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.
Now 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 evaluation of a company's future performance, so try the calculation yourself and check your own assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at WCM Beteiligungs- und Grundbesitz-AG 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 accounts for debt. In this calculation we've used 6.2%, which is based on a levered beta of 1.129. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
Check out our latest analysis for WCM Beteiligungs- und Grundbesitz-AG
Although the valuation of a company is important, it is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For WCM Beteiligungs- und Grundbesitz-AG, we've put together three additional elements you should further examine:
Risks: Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with WCM Beteiligungs- und Grundbesitz-AG (at least 1 which doesn't sit too well with us) , and understanding these should be part of your investment process.
Other Solid Businesses: 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 business fundamentals to see if there are other companies you may not have considered!
Other Top Analyst Picks: Interested to see what the analysts are thinking? Take a look at our interactive list of analysts' top stock picks to find out what they feel might have an attractive future outlook!
PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the HMSE every day. If you want to find the calculation for other stocks just search here.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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