Are Investors Undervaluing Novem Group S.A. (ETR:NVM) By 36%?

Yahoo

3 days ago

Using the 2 Stage Free Cash Flow to Equity, Novem Group fair value estimate is €6.91
Current share price of €4.45 suggests Novem Group is potentially 36% undervalued
Novem Group's peers are currently trading at a premium of 202% on average
In this article we are going to estimate the intrinsic value of Novem Group S.A. (ETR:NVM) by projecting its future cash flows and then discounting them to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
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We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or 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 discount the value of these future cash flows to their estimated value in today's dollars:
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF (€, Millions)
€19.1m
€20.5m
€29.2m
€25.5m
€23.3m
€22.0m
€21.2m
€20.7m
€20.5m
€20.4m
Growth Rate Estimate Source
Analyst x2
Analyst x2
Analyst x1
Est @ -12.80%
Est @ -8.58%
Est @ -5.63%
Est @ -3.56%
Est @ -2.11%
Est @ -1.10%
Est @ -0.39%
Present Value (€, Millions) Discounted @ 7.9%
€17.7
€17.6
€23.3
€18.8
€15.9
€13.9
€12.5
€11.3
€10.4
€9.6
("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = €151m
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 7.9%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = €20m× (1 + 1.3%) ÷ (7.9%– 1.3%) = €313m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= €313m÷ ( 1 + 7.9%)10= €147m
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is €297m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of €4.5, the company appears quite undervalued at a 36% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.
We would point out 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 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 Novem Group 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 7.9%, which is based on a levered beta of 1.527. 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.
See our latest analysis for Novem Group
Strength
No major strengths identified for NVM.
Weakness
Earnings declined over the past year.
Interest payments on debt are not well covered.
Opportunity
Trading below our estimate of fair value by more than 20%.
Threat
Debt is not well covered by operating cash flow.
Although the valuation of a company is important, it is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. 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. Can we work out why the company is trading at a discount to intrinsic value? For Novem Group, we've put together three relevant elements you should consider:
Risks: Every company has them, and we've spotted 2 warning signs for Novem Group (of which 1 is potentially serious!) you should know about.
Future Earnings: How does NVM's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
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!
PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the XTRA 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.