Is There An Opportunity With Balta Group NV's (EBR:BALTA) 48.5% Undervaluation?

July 26, 2018

I am going to run you through how I calculated the intrinsic value of Balta Group NV (EBR:BALTA) by taking the foreast future cash flows of the company and discounting them back to today's value. I will be using the discounted cash flows (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward. If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model. If you are reading this and its not July 2018 then I highly recommend you check out the latest calculation for Balta Group by following the link below.

View our latest analysis for Balta Group

What's the value?

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 five years of cash flows. Where possible I use analyst estimates, but when these aren't available I have extrapolated the previous free cash flow (FCF) from the year before. For this growth rate I used the average annual growth rate over the past five years, but capped at a reasonable level. I then discount the sum of these cash flows to arrive at a present value estimate.

5-year cash flow forecast

	2018	2019	2020	2021	2022
Levered FCF (€, Millions)	€42.00	€67.00	€60.00	€63.23	€66.64
Source	Analyst x1	Analyst x1	Analyst x1	Extrapolated @ (5.39%)	Extrapolated @ (5.39%)
Present Value Discounted @ 17.02%	€35.89	€48.93	€37.45	€33.72	€30.37

Present Value of 5-year Cash Flow (PVCF)= €186.36m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after the five years. For a number of reasons a very conservative growth rate is used that cannot exceed that of the GDP. In this case I have used the 10-year government bond rate (0.9%). In the same way as with the 5-year 'growth' period, we discount this to today's value at a cost of equity of 17%.

Terminal Value (TV) = FCF₂₀₂₂ × (1 + g) ÷ (r – g) = €66.64m × (1 + 0.9%) ÷ (17% – 0.9%) = €418.07m

Present Value of Terminal Value (PVTV) = TV / (1 + r)⁵ = €418.07m ÷ ( 1 + 17%)⁵ = €190.54m

The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is €376.90m. In the final step we divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) or ADR then we use the equivalent number. This results in an intrinsic value of €10.49. Compared to the current share price of €5.4, the stock is quite good value at a 48.50% discount to what it is available for right now.

ENXTBR:BALTA Intrinsic Value Export July 27th 18

The assumptions

I'd like to 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 my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Balta Group as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I've used 17%, which is based on a levered beta of 1.774. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Next Steps:

Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For BALTA, there are three essential factors you should look at:

Financial Health: Does BALTA 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 BALTA'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: Are there other high quality stocks you could be holding instead of BALTA? 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 does a DCF calculation for every BE stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.

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The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article 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.