Today we are going to do a simple overview of a valuation method used to estimate the attractiveness of Oponeo.pl SA (WSE: OPN) as an investment opportunity by projecting its future flows. of cash and then discounting it to today’s value. To this end, we will take advantage of the Discounted Cash Flow (DCF) model. Patterns like these may seem beyond a layman’s comprehension, but they are fairly easy to follow.

Remember, however, that there are many ways to estimate the value of a business and that a DCF is just one method. If you still have burning questions about this type of valuation, take a look at the Simply Wall St.

See our latest review for Oponeo.pl

What is the estimated valuation?

We are going to use a two-step DCF model, which, as the name suggests, takes into account two stages of growth. The first stage is usually a period of higher growth which stabilizes towards the terminal value, captured in the second period of “steady growth”. To begin with, we need to estimate the next ten years of cash flow. 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.

A DCF is based on the idea that a dollar in the future is worth less than a dollar today, and therefore the sum of those future cash flows is then discounted to today’s value. :

10-year Free Cash Flow (FCF) estimate

2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Leverage FCF (PLN, Millions) zł38.9m zł42.9m zł48.4m zł54.0m zł58.2m zł61.8m zł65.0m zł67.8m zł70.3m zł72.7m
Source of estimated growth rate Analyst x1 Analyst x1 Analyst x1 Analyst x1 Est @ 7.79% Is 6.2% East @ 5.09% East @ 4.31% East @ 3.76% East @ 3.38%
Present value (PLN, millions) discounted at 7.8% zł36.1 zł36.9 zł38.6 zł40.0 zł40.0 zł39.4 zł38.4 zł37.2 zł35.8 zł34.3

(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = zł376m

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. The Gordon growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.5%. We discount the terminal cash flows to their present value at a cost of equity of 7.8%.

Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = zł73m × (1 + 2.5%) ÷ (7.8% – 2.5%) = zł1.4b

Present value of terminal value (PVTV)= TV / (1 + r)ten= zł1.4b ÷ (1 + 7.8%)ten= zł664m

Total value, or net worth, is then the sum of the present value of future cash flows, which in this case is zł1.0b. The last step is then to divide the equity value by the number of shares outstanding. Compared to the current share price of 63.4 z, the company is shown at fair value at a discount of 15% from the current share price. Ratings are imprecise instruments, however, much like a telescope – move a few degrees and end up in another galaxy. Keep this in mind.

WSE: OPN Discounted Cash Flow on December 28, 2021

The hypotheses

The above calculation is very dependent on two assumptions. One is the discount rate and the other is the cash flow. If you don’t agree with these results, try the calculation yourself and play with the assumptions. 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 Oponeo.pl 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 takes debt into account. . In this calculation, we used 7.8%, which is based on a leveraged beta of 1.041. 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.

Next steps:

While a business valuation is important, ideally it won’t be the only analysis that you look at for a business. The DCF model is not a perfect stock assessment tool. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under / overvalued?” If a business grows at a different rate, or if its cost of equity or risk-free rate changes sharply, output can be very different. For Oponeo.pl, we have put together three relevant factors to consider:

  1. Financial health: Does OPN 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.
  2. Future benefits: How does OPN’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.
  3. 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. The Simply Wall St app performs a daily discounted cash flow assessment for each WSE share. If you want to find the calculation for other actions, just search here.

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.