Does the February price of the WALLIX GROUP SA (EPA:ALLIX) share reflect what it is really worth? Today we are going to estimate the intrinsic value of the stock by taking the expected future cash flows and discounting them to their present value. Our analysis will use the discounted cash flow (DCF) model. Patterns like these may seem beyond a layman’s comprehension, but they’re pretty easy to follow.
We generally believe that the value of a company is the present value of all the cash it will generate in the future. However, a DCF is just one of many evaluation metrics, and it is not without its flaws. Anyone interested in learning a little more about intrinsic value should read the Simply Wall St.
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Is WALLIX GROUP correctly valued?
We will use a two-stage 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 “sustained growth”. To begin with, we need to obtain cash flow estimates for the next ten years. Wherever possible, we use analysts’ estimates, but where these are not available, we extrapolate the previous free cash flow (FCF) from the latest estimate or reported 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 more in early years than in later years.
Generally, we assume that a dollar today is worth more than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today’s dollars:
10-Year Free Cash Flow (FCF) Forecast
|Leveraged FCF (€, Millions)||-€1.90m||€1.60 million||€2.59m||€3.72m||€4.86 million||€5.91m||€6.80m||€7.53 million||€8.10 million||€8.53m|
|Growth rate estimate Source||Analyst x1||Analyst x1||Is at 62.09%||Is at 43.55%||Is at 30.58%||East @ 21.49%||Is at 15.14%||Is at 10.68%||Is at 7.57%||Is at 5.39%|
|Present value (€, millions) discounted at 5.1%||-1.8€||1.4 €||2.2 €||3.1 €||3.8 €||4.4 €||4.8 €||5.1 €||5.2 €||5.2 €|
(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = €33m
The second stage is also known as the terminal value, it is the cash flow of the business after the first stage. 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 0.3%. We discount terminal cash flows to present value at a cost of equity of 5.1%.
Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = €8.5m × (1 + 0.3%) ÷ (5.1%– 0.3%) = €180m
Present value of terminal value (PVTV)= TV / (1 + r)ten= €180m÷ ( 1 + 5.1%)ten= €110m
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 143 million euros. The final step is to divide the equity value by the number of shares outstanding. Compared to the current share price of €19.6, the company appears to be approximately fair value at a 19% discount to the current share price. Ratings are imprecise instruments, however, much like a telescope – move a few degrees and end up in another galaxy. Keep that in mind.
Now, 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 assessment of a company’s future performance, so try the math yourself and check your own 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 complete picture of a company’s potential performance. Since we consider WALLIX GROUP as potential shareholders, the cost of equity is used as the discount rate, and not the cost of capital (or weighted average cost of capital, WACC) which takes debt into account. In this calculation, we used 5.1%, which is based on a leveraged beta of 1.005. Beta is a measure of a stock’s volatility relative to the market as a whole. We derive our beta from the average industry beta of broadly comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
Let’s move on :
While a business valuation is important, it shouldn’t be the only metric to consider when researching a business. DCF models are not the be-all and end-all of investment valuation. Instead, the best use of 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, if the terminal value growth rate is adjusted slightly, it can significantly change the overall result. For WALLIX GROUP, we have collected three additional items for you to assess:
- Risks: For example, we have identified 1 warning sign for WALLIX GROUP of which you should be aware.
- Future earnings: How does ALLIX’s growth rate compare to its peers and the wider market? Dive deeper into the analyst consensus figure for the coming years by interacting with our free analyst growth forecast chart.
- Other high-quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality actions to get an idea of what you might be missing!
PS. The Simply Wall St app performs an updated cash flow assessment for each ENXTPA stock every day. If you want to find the calculation for other stocks, search here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.