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Yahoo
a day ago
- Business
- Yahoo
Are Investors Undervaluing Treasury Wine Estates Limited (ASX:TWE) By 47%?
Using the 2 Stage Free Cash Flow to Equity, Treasury Wine Estates fair value estimate is AU$15.36 Treasury Wine Estates' AU$8.17 share price signals that it might be 47% undervalued Our fair value estimate is 38% higher than Treasury Wine Estates' analyst price target of AU$11.16 Does the June share price for Treasury Wine Estates Limited (ASX:TWE) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the expected future cash flows and discounting them to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Don't get put off by the jargon, the math behind it is actually quite straightforward. Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you. AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early. We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years. Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value: 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 Levered FCF (A$, Millions) AU$472.8m AU$434.4m AU$498.0m AU$496.8m AU$500.5m AU$507.5m AU$517.0m AU$528.3m AU$541.1m AU$555.1m Growth Rate Estimate Source Analyst x4 Analyst x4 Analyst x3 Analyst x1 Est @ 0.74% Est @ 1.40% Est @ 1.87% Est @ 2.19% Est @ 2.42% Est @ 2.58% Present Value (A$, Millions) Discounted @ 6.4% AU$444 AU$384 AU$413 AU$387 AU$367 AU$350 AU$335 AU$321 AU$309 AU$298 ("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = AU$3.6b We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.9%. We discount the terminal cash flows to today's value at a cost of equity of 6.4%. Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = AU$555m× (1 + 2.9%) ÷ (6.4%– 2.9%) = AU$16b Present Value of Terminal Value (PVTV)= TV / (1 + r)10= AU$16b÷ ( 1 + 6.4%)10= AU$8.9b 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 AU$12b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of AU$8.2, the company appears quite good value at a 47% 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 Treasury Wine Estates 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 6.4%, which is based on a levered beta of 0.800. 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. View our latest analysis for Treasury Wine Estates Strength Debt is not viewed as a risk. Weakness Earnings declined over the past year. Dividend is low compared to the top 25% of dividend payers in the Beverage market. Opportunity Annual earnings are forecast to grow faster than the Australian market. Trading below our estimate of fair value by more than 20%. Threat Dividends are not covered by earnings and cashflows. Annual revenue is forecast to grow slower than the Australian market. 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 company. It's not possible to obtain a foolproof valuation with a DCF model. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. Can we work out why the company is trading at a discount to intrinsic value? For Treasury Wine Estates, there are three additional factors you should look at: Risks: Be aware that Treasury Wine Estates is showing 2 warning signs in our investment analysis , and 1 of those is a bit concerning... Future Earnings: How does TWE'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 High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing! PS. Simply Wall St updates its DCF calculation for every Australian stock every day, so if you want to find the intrinsic value of any other stock just search here. Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) 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. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Yahoo
02-06-2025
- Business
- Yahoo
Is Singapore Airlines Limited (SGX:C6L) Worth S$7.1 Based On Its Intrinsic Value?
Singapore Airlines' estimated fair value is S$5.28 based on 2 Stage Free Cash Flow to Equity Singapore Airlines' S$7.12 share price signals that it might be 35% overvalued Our fair value estimate is 20% lower than Singapore Airlines' analyst price target of S$6.59 In this article we are going to estimate the intrinsic value of Singapore Airlines Limited (SGX:C6L) 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. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow. Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you. This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality. 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. 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. Generally we assume that a dollar today is more valuable than a dollar in the future, 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 (SGD, Millions) S$343.2m S$54.5m S$211.5m S$1.80b S$1.47b S$1.29b S$1.19b S$1.14b S$1.11b S$1.09b Growth Rate Estimate Source Analyst x2 Analyst x3 Analyst x4 Analyst x3 Est @ -18.35% Est @ -12.14% Est @ -7.79% Est @ -4.74% Est @ -2.61% Est @ -1.12% Present Value (SGD, Millions) Discounted @ 7.9% S$318 S$46.9 S$169 S$1.3k S$1.0k S$822 S$703 S$621 S$561 S$514 ("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = S$6.1b The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.4%. We discount the terminal cash flows to today's value at a cost of equity of 7.9%. Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = S$1.1b× (1 + 2.4%) ÷ (7.9%– 2.4%) = S$20b Present Value of Terminal Value (PVTV)= TV / (1 + r)10= S$20b÷ ( 1 + 7.9%)10= S$9.6b 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 S$16b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of S$7.1, the company appears reasonably expensive at the time of writing. 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. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 Singapore Airlines 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 1.269. 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 Singapore Airlines Strength Debt is not viewed as a risk. Dividends are covered by earnings and cash flows. Weakness Earnings growth over the past year underperformed the Airlines industry. Dividend is low compared to the top 25% of dividend payers in the Airlines market. Opportunity Good value based on P/E ratio compared to estimated Fair P/E ratio. Threat Annual earnings are forecast to decline for the next 3 years. Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize for a company. It's not possible to obtain a foolproof valuation with a DCF model. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. What is the reason for the share price exceeding the intrinsic value? For Singapore Airlines, we've put together three fundamental items you should further examine: Risks: Every company has them, and we've spotted 3 warning signs for Singapore Airlines (of which 1 is significant!) you should know about. Future Earnings: How does C6L'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 High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing! PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the SGX 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) 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. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Yahoo
02-06-2025
- Business
- Yahoo
Is There An Opportunity With IPD Group Limited's (ASX:IPG) 38% Undervaluation?
IPD Group's estimated fair value is AU$4.90 based on 2 Stage Free Cash Flow to Equity Current share price of AU$3.06 suggests IPD Group is potentially 38% undervalued The AU$4.24 analyst price target for IPG is 13% less than our estimate of fair value Today we'll do a simple run through of a valuation method used to estimate the attractiveness of IPD Group Limited (ASX:IPG) as an investment opportunity by projecting its future cash flows and then discounting them to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex. Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Trump has pledged to "unleash" American oil and gas and these 15 US stocks have developments that are poised to benefit. We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years. A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value: 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 Levered FCF (A$, Millions) AU$30.0m AU$23.0m AU$31.7m AU$30.2m AU$29.4m AU$29.2m AU$29.3m AU$29.6m AU$30.1m AU$30.7m Growth Rate Estimate Source Analyst x4 Analyst x4 Analyst x3 Est @ -4.75% Est @ -2.44% Est @ -0.82% Est @ 0.31% Est @ 1.10% Est @ 1.66% Est @ 2.04% Present Value (A$, Millions) Discounted @ 7.8% AU$27.8 AU$19.8 AU$25.3 AU$22.4 AU$20.2 AU$18.6 AU$17.3 AU$16.3 AU$15.3 AU$14.5 ("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = AU$198m We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.9%. We discount the terminal cash flows to today's value at a cost of equity of 7.8%. Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = AU$31m× (1 + 2.9%) ÷ (7.8%– 2.9%) = AU$656m Present Value of Terminal Value (PVTV)= TV / (1 + r)10= AU$656m÷ ( 1 + 7.8%)10= AU$311m The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is AU$508m. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of AU$3.1, the company appears quite undervalued at a 38% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent. 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 IPD 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 7.8%, which is based on a levered beta of 1.112. 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 IPD Group Strength Earnings growth over the past year exceeded the industry. Debt is not viewed as a risk. Dividends are covered by earnings and cash flows. Weakness Dividend is low compared to the top 25% of dividend payers in the Trade Distributors market. Opportunity Annual revenue is forecast to grow faster than the Australian market. Trading below our estimate of fair value by more than 20%. Threat Annual earnings are forecast to grow slower than the Australian market. Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. DCF models are not the be-all and end-all of investment valuation. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Why is the intrinsic value higher than the current share price? For IPD Group, there are three pertinent elements you should further examine: Financial Health: Does IPG have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk. Future Earnings: How does IPG'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 High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing! PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the ASX 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) 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. Sign in to access your portfolio
Yahoo
30-05-2025
- Business
- Yahoo
Wacker Chemie AG's (ETR:WCH) Intrinsic Value Is Potentially 81% Above Its Share Price
The projected fair value for Wacker Chemie is €114 based on 2 Stage Free Cash Flow to Equity Current share price of €63.05 suggests Wacker Chemie is potentially 45% undervalued Analyst price target for WCH is €85.80 which is 25% below our fair value estimate Does the May share price for Wacker Chemie AG (ETR:WCH) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by projecting its future cash flows and then discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine. We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you. Trump has pledged to "unleash" American oil and gas and these 15 US stocks have developments that are poised to benefit. 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 start off with, we need to estimate the next ten years of cash flows. 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. Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value: 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 Levered FCF (€, Millions) €219.3m €416.3m €382.3m €346.0m €325.1m €312.6m €305.4m €301.7m €300.2m €300.3m Growth Rate Estimate Source Analyst x4 Analyst x4 Analyst x3 Analyst x1 Est @ -6.03% Est @ -3.84% Est @ -2.31% Est @ -1.23% Est @ -0.48% Est @ 0.04% Present Value (€, Millions) Discounted @ 6.3% €206 €369 €319 €271 €240 €217 €200 €186 €174 €164 ("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = €2.3b The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 1.3%. We discount the terminal cash flows to today's value at a cost of equity of 6.3%. Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = €300m× (1 + 1.3%) ÷ (6.3%– 1.3%) = €6.1b Present Value of Terminal Value (PVTV)= TV / (1 + r)10= €6.1b÷ ( 1 + 6.3%)10= €3.3b The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is €5.7b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of €63.1, the company appears quite undervalued at a 45% 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. Now 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 inputs, I recommend redoing the calculations yourself and playing with them. 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 Wacker Chemie 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 6.3%, which is based on a levered beta of 1.152. 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. View our latest analysis for Wacker Chemie Strength Debt is well covered by earnings. Weakness Earnings declined over the past year. Dividend is low compared to the top 25% of dividend payers in the Chemicals market. Opportunity Annual earnings are forecast to grow faster than the German market. Good value based on P/E ratio and estimated fair value. Threat Debt is not well covered by operating cash flow. Paying a dividend but company has no free cash flows. Annual revenue is forecast to grow slower than the German market. Valuation is only one side of the coin in terms of building your investment thesis, and 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?" If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. Why is the intrinsic value higher than the current share price? For Wacker Chemie, we've compiled three fundamental factors you should assess: Risks: For example, we've discovered 1 warning sign for Wacker Chemie that you should be aware of before investing here. Future Earnings: How does WCH'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) 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. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Yahoo
30-05-2025
- Business
- Yahoo
An Intrinsic Calculation For Frequentis AG (ETR:FQT) Suggests It's 42% Undervalued
Frequentis' estimated fair value is €81.33 based on 2 Stage Free Cash Flow to Equity Frequentis is estimated to be 42% undervalued based on current share price of €47.10 Analyst price target for FQT is €45.55 which is 44% below our fair value estimate Today we will run through one way of estimating the intrinsic value of Frequentis AG (ETR:FQT) by taking the expected future cash flows and discounting them to their present value. Our analysis will employ the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward. We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early. 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 start off with, we need to estimate the next ten years of cash flows. 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 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) €37.0m €32.7m €34.4m €40.7m €46.4m €50.5m €53.7m €56.4m €58.6m €60.4m Growth Rate Estimate Source Analyst x4 Analyst x4 Analyst x3 Analyst x2 Analyst x1 Est @ 8.75% Est @ 6.51% Est @ 4.94% Est @ 3.84% Est @ 3.07% Present Value (€, Millions) Discounted @ 5.9% €35.0 €29.2 €28.9 €32.4 €34.8 €35.8 €36.0 €35.6 €34.9 €34.0 ("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = €337m The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 1.3%. We discount the terminal cash flows to today's value at a cost of equity of 5.9%. Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = €60m× (1 + 1.3%) ÷ (5.9%– 1.3%) = €1.3b Present Value of Terminal Value (PVTV)= TV / (1 + r)10= €1.3b÷ ( 1 + 5.9%)10= €743m 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 €1.1b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of €47.1, the company appears quite undervalued at a 42% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent. The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 Frequentis 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 5.9%, which is based on a levered beta of 0.954. 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 Frequentis Strength Debt is not viewed as a risk. Weakness Earnings growth over the past year underperformed the Aerospace & Defense industry. Dividend is low compared to the top 25% of dividend payers in the Aerospace & Defense market. Opportunity Annual revenue is forecast to grow faster than the German market. Trading below our estimate of fair value by more than 20%. Threat Annual earnings are forecast to grow slower than the German market. Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Why is the intrinsic value higher than the current share price? For Frequentis, we've put together three essential aspects you should explore: Financial Health: Does FQT have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk. Future Earnings: How does FQT'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) 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.
