In this article, we will estimate the intrinsic value of B&S Group SA (AMS: BSGR) by projecting its future cash flows and then discounting them to present value. This will be done using the Discounted Cash Flow (DCF) model. It may sound complicated, but it’s actually quite simple!

There are many ways that businesses can be assessed, so we would like to point out that a DCF is not perfect for all situations. Anyone interested in learning a bit more about intrinsic value should read the Simply Wall St.

See our latest analysis for B&S Group

The model

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.

In general, we assume that a dollar today is worth more than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at an estimate of the present value:

10-year Free Cash Flow (FCF) estimate

2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Leverage FCF (€, Millions) € 30.0m € 46.0m 50.3 million euros € 53.6 million € 56.1m € 57.9m € 59.2m € 60.2m € 60.9m € 61.4m
Source of estimated growth rate Analyst x1 Analyst x1 Est @ 9.33% Est @ 6.56% East @ 4.62% East @ 3.26% East @ 2.31% East @ 1.64% Est @ 1.18% Is @ 0.85%
Present value (€, Millions) discounted at 5.9% € 28.3 € 41.0 € 42.3 € 42.6 € 42.1 € 41.0 € 39.7 € 38.1 € 36.4 € 34.6

(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = 386 M €

The second stage is also known as terminal value, it is the cash flow of the business 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 used the 5-year average of the 10-year government bond yield (0.09%) to estimate future growth. Similar to the 10-year “growth” period, we discount future cash flows to their present value, using a cost of equity of 5.9%.

Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = € 61m × (1 + 0.09%) ÷ (5.9% – 0.09%) = € 1.1 billion

Present value of terminal value (PVTV)= TV / (1 + r)ten= € 1.1bn ÷ (1 + 5.9%)ten= 597 M €

The total value is the sum of the cash flows for the next ten years plus the present terminal value, which gives the Total Equity Value, which in this case is € 983m. To get the intrinsic value per share, we divide it by the total number of shares outstanding. Compared to the current share price of € 7.5, the company appears to be quite undervalued with a 36% discount from the current share price. Remember, however, that this is only a rough estimate, and like any complex formula – trash in, trash out.

ENXTAM: BSGR Discounted Cash Flow January 6, 2022

The hypotheses

We draw your attention to the fact that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. 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 view B&S 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 takes into account debt. In this calculation, we used 5.9%, which is based on a leveraged beta of 1.326. 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 from globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Next steps:

While important, calculating DCF shouldn’t be the only metric you look at when looking for a business. The DCF model is not a perfect stock assessment tool. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to undervaluation or overvaluation of the company. For example, changes in the company’s cost of equity or the risk-free rate can have a significant impact on valuation. Why is intrinsic value greater than the current share price? For B&S Group, we have put together three fundamental elements that you need to assess:

  1. Risks: As an example, we have found 1 warning sign for B&S Group that you need to consider before investing here.
  2. Future benefits: How does BSGR’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 high quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality stocks to get a feel for what you might be missing!

PS. The Simply Wall St app performs a daily discounted cash flow assessment for each ENXTAM 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.

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