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Yahoo
3 days ago
- Business
- Yahoo
Estimating The Fair Value Of Burckhardt Compression Holding AG (VTX:BCHN)
Burckhardt Compression Holding's estimated fair value is CHF739 based on 2 Stage Free Cash Flow to Equity With CHF610 share price, Burckhardt Compression Holding appears to be trading close to its estimated fair value The CHF716 analyst price target for BCHN is 3.1% less than our estimate of fair value How far off is Burckhardt Compression Holding AG (VTX:BCHN) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by estimating the company's future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model on this occasion. 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 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. If you still have some burning questions about this type of valuation, take a look at 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 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 (CHF, Millions) CHF33.8m CHF82.8m CHF96.0m CHF105.3m CHF112.5m CHF118.0m CHF122.3m CHF125.5m CHF128.0m CHF129.9m Growth Rate Estimate Source Analyst x2 Analyst x2 Analyst x2 Est @ 9.64% Est @ 6.87% Est @ 4.94% Est @ 3.58% Est @ 2.63% Est @ 1.97% Est @ 1.50% Present Value (CHF, Millions) Discounted @ 5.1% CHF32.2 CHF75.0 CHF82.8 CHF86.4 CHF87.9 CHF87.8 CHF86.6 CHF84.6 CHF82.1 CHF79.3 ("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = CHF785m 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 (0.4%) 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 5.1%. Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = CHF130m× (1 + 0.4%) ÷ (5.1%– 0.4%) = CHF2.8b Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CHF2.8b÷ ( 1 + 5.1%)10= CHF1.7b The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is CHF2.5b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of CHF610, the company appears about fair value at a 17% 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 Burckhardt Compression Holding 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 5.1%, which is based on a levered beta of 1.071. 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 Burckhardt Compression Holding Strength Earnings growth over the past year exceeded the industry. Debt is not viewed as a risk. Weakness Earnings growth over the past year is below its 5-year average. Dividend is low compared to the top 25% of dividend payers in the Machinery market. Opportunity Annual revenue is forecast to grow faster than the Swiss market. Current share price is below our estimate of fair value. Threat Dividends are not covered by cash flow. Annual earnings are forecast to grow slower than the Swiss market. Whilst important, the DCF calculation 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. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Burckhardt Compression Holding, there are three important aspects you should consider: Risks: Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with Burckhardt Compression Holding , and understanding this should be part of your investment process. Future Earnings: How does BCHN'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. Simply Wall St updates its DCF calculation for every Swiss 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
3 days ago
- Business
- Yahoo
Estimating The Fair Value Of Burckhardt Compression Holding AG (VTX:BCHN)
Burckhardt Compression Holding's estimated fair value is CHF739 based on 2 Stage Free Cash Flow to Equity With CHF610 share price, Burckhardt Compression Holding appears to be trading close to its estimated fair value The CHF716 analyst price target for BCHN is 3.1% less than our estimate of fair value How far off is Burckhardt Compression Holding AG (VTX:BCHN) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by estimating the company's future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model on this occasion. 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 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. If you still have some burning questions about this type of valuation, take a look at 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 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 (CHF, Millions) CHF33.8m CHF82.8m CHF96.0m CHF105.3m CHF112.5m CHF118.0m CHF122.3m CHF125.5m CHF128.0m CHF129.9m Growth Rate Estimate Source Analyst x2 Analyst x2 Analyst x2 Est @ 9.64% Est @ 6.87% Est @ 4.94% Est @ 3.58% Est @ 2.63% Est @ 1.97% Est @ 1.50% Present Value (CHF, Millions) Discounted @ 5.1% CHF32.2 CHF75.0 CHF82.8 CHF86.4 CHF87.9 CHF87.8 CHF86.6 CHF84.6 CHF82.1 CHF79.3 ("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = CHF785m 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 (0.4%) 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 5.1%. Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = CHF130m× (1 + 0.4%) ÷ (5.1%– 0.4%) = CHF2.8b Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CHF2.8b÷ ( 1 + 5.1%)10= CHF1.7b The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is CHF2.5b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of CHF610, the company appears about fair value at a 17% 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 Burckhardt Compression Holding 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 5.1%, which is based on a levered beta of 1.071. 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 Burckhardt Compression Holding Strength Earnings growth over the past year exceeded the industry. Debt is not viewed as a risk. Weakness Earnings growth over the past year is below its 5-year average. Dividend is low compared to the top 25% of dividend payers in the Machinery market. Opportunity Annual revenue is forecast to grow faster than the Swiss market. Current share price is below our estimate of fair value. Threat Dividends are not covered by cash flow. Annual earnings are forecast to grow slower than the Swiss market. Whilst important, the DCF calculation 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. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Burckhardt Compression Holding, there are three important aspects you should consider: Risks: Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with Burckhardt Compression Holding , and understanding this should be part of your investment process. Future Earnings: How does BCHN'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. Simply Wall St updates its DCF calculation for every Swiss 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.
Yahoo
5 days ago
- Business
- Yahoo
Estimating The Fair Value Of CWG Holdings Berhad (KLSE:CWG)
CWG Holdings Berhad's estimated fair value is RM0.17 based on 2 Stage Free Cash Flow to Equity With RM0.17 share price, CWG Holdings Berhad appears to be trading close to its estimated fair value Industry average of 209% suggests CWG Holdings Berhad's peers are currently trading at a higher premium to fair value In this article we are going to estimate the intrinsic value of CWG Holdings Berhad (KLSE:CWG) by estimating the company's future cash flows and discounting them to their present 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. Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model. 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 start off with, we need to estimate 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, 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 (MYR, Millions) RM4.16m RM3.66m RM3.39m RM3.25m RM3.19m RM3.19m RM3.22m RM3.27m RM3.35m RM3.44m Growth Rate Estimate Source Est @ -18.92% Est @ -12.15% Est @ -7.41% Est @ -4.10% Est @ -1.78% Est @ -0.15% Est @ 0.99% Est @ 1.78% Est @ 2.34% Est @ 2.73% Present Value (MYR, Millions) Discounted @ 9.8% RM3.8 RM3.0 RM2.6 RM2.2 RM2.0 RM1.8 RM1.7 RM1.5 RM1.4 RM1.4 ("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = RM21m The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. 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 (3.6%) 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 9.8%. Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = RM3.4m× (1 + 3.6%) ÷ (9.8%– 3.6%) = RM58m Present Value of Terminal Value (PVTV)= TV / (1 + r)10= RM58m÷ ( 1 + 9.8%)10= RM23m The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is RM44m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of RM0.2, the company appears around fair value 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. 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. 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 CWG Holdings Berhad 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 9.8%, which is based on a levered beta of 1.041. 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 CWG Holdings Berhad Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. 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. For CWG Holdings Berhad, there are three important elements you should further examine: Risks: For example, we've discovered 4 warning signs for CWG Holdings Berhad (2 are a bit concerning!) that you should be aware of before investing here. 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! 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. Simply Wall St updates its DCF calculation for every Malaysian 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. Sign in to access your portfolio
Yahoo
25-05-2025
- Business
- Yahoo
Calculating The Intrinsic Value Of Vista Group International Limited (NZSE:VGL)
The projected fair value for Vista Group International is NZ$3.50 based on 2 Stage Free Cash Flow to Equity Vista Group International's NZ$3.50 share price indicates it is trading at similar levels as its fair value estimate Our fair value estimate is 14% lower than Vista Group International's analyst price target of NZ$4.07 How far off is Vista Group International Limited (NZSE:VGL) 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. Our analysis will employ 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. 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 $10bn in marketcap - there is still time to get in early. We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years. Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars: 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 Levered FCF (NZ$, Millions) NZ$2.17m NZ$11.9m NZ$22.5m NZ$31.7m NZ$38.9m NZ$45.5m NZ$51.3m NZ$56.5m NZ$61.0m NZ$65.0m Growth Rate Estimate Source Analyst x3 Analyst x3 Analyst x3 Analyst x1 Est @ 22.73% Est @ 16.92% Est @ 12.85% Est @ 10.00% Est @ 8.01% Est @ 6.62% Present Value (NZ$, Millions) Discounted @ 8.3% NZ$2.0 NZ$10.1 NZ$17.7 NZ$23.0 NZ$26.1 NZ$28.2 NZ$29.4 NZ$29.8 NZ$29.7 NZ$29.3 ("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = NZ$225m 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 3.4%. We discount the terminal cash flows to today's value at a cost of equity of 8.3%. Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = NZ$65m× (1 + 3.4%) ÷ (8.3%– 3.4%) = NZ$1.4b Present Value of Terminal Value (PVTV)= TV / (1 + r)10= NZ$1.4b÷ ( 1 + 8.3%)10= NZ$611m 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 NZ$837m. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of NZ$3.5, the company appears about fair value at a 0.09% 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. 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 Vista Group International 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 8.3%, which is based on a levered beta of 1.143. 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 Vista Group International Strength Debt is well covered by cash flow. Weakness Interest payments on debt are not well covered. Opportunity Expected to breakeven next year. Has sufficient cash runway for more than 3 years based on current free cash flows. Good value based on P/S ratio and estimated fair value. Threat No apparent threats visible for VGL. 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. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Vista Group International, we've put together three essential aspects you should further examine: Risks: We feel that you should assess the 2 warning signs for Vista Group International we've flagged before making an investment in the company. Future Earnings: How does VGL'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. Simply Wall St updates its DCF calculation for every New Zealander 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.
Yahoo
17-05-2025
- Business
- Yahoo
Is Capricorn Energy PLC (LON:CNE) Trading At A 28% Discount?
Capricorn Energy's estimated fair value is UK£2.98 based on 2 Stage Free Cash Flow to Equity Current share price of UK£2.16 suggests Capricorn Energy is potentially 28% undervalued Our fair value estimate is 17% higher than Capricorn Energy's analyst price target of US$2.55 Today we will run through one way of estimating the intrinsic value of Capricorn Energy PLC (LON:CNE) by taking the expected future cash flows and discounting them to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. There's really not all that much to it, even though it might appear quite complex. Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model. We've discovered 3 warning signs about Capricorn Energy. View them for free. We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years. Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars: 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 Levered FCF ($, Millions) -US$13.1m US$39.7m US$27.6m US$21.4m US$18.2m US$16.4m US$15.4m US$14.9m US$14.6m US$14.5m Growth Rate Estimate Source Analyst x2 Analyst x3 Analyst x3 Est @ -22.41% Est @ -14.99% Est @ -9.81% Est @ -6.17% Est @ -3.63% Est @ -1.85% Est @ -0.61% Present Value ($, Millions) Discounted @ 7.2% -US$12.3 US$34.6 US$22.5 US$16.3 US$12.9 US$10.9 US$9.5 US$8.6 US$7.8 US$7.3 ("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = US$118m 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 2.3%. We discount the terminal cash flows to today's value at a cost of equity of 7.2%. Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = US$15m× (1 + 2.3%) ÷ (7.2%– 2.3%) = US$306m Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$306m÷ ( 1 + 7.2%)10= US$153m The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$271m. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of UK£2.2, the company appears a touch undervalued at a 28% 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. The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Capricorn Energy 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 7.2%, which is based on a levered beta of 0.946. 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 Capricorn Energy Strength Debt is not viewed as a risk. Dividend is in the top 25% of dividend payers in the market. Weakness No major weaknesses identified for CNE. Opportunity Has sufficient cash runway for more than 3 years based on current free cash flows. Good value based on P/S ratio and estimated fair value. Threat Not expected to become profitable over the next 3 years. Whilst important, the DCF calculation shouldn't be the only metric you look at when researching 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 example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. What is the reason for the share price sitting below the intrinsic value? For Capricorn Energy, there are three essential elements you should explore: Risks: For instance, we've identified 3 warning signs for Capricorn Energy (1 is concerning) you should be aware of. Future Earnings: How does CNE'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 LSE 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.
