Cencosud S.A.'s (SNSE:CENCOSUD) Intrinsic Value Is Potentially 73% Above Its Share Price

Key Insights

• Cencosud's estimated fair value is CL$5,102 based on 2 Stage Free Cash Flow to Equity
• Cencosud's CL$2,941 share price signals that it might be 42% undervalued
• Our fair value estimate is 61% higher than Cencosud's analyst price target of CL$3,175

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Cencosud S.A. (SNSE:CENCOSUD) as an investment opportunity 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. Don't get put off by the jargon, the math behind it is actually quite straightforward.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. 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.

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Is Cencosud Fairly Valued?

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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, 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

	2026	2027	2028	2029	2030	2031	2032	2033	2034	2035
Levered FCF (CLP, Millions)	CL$743.1b	CL$801.3b	CL$853.5b	CL$906.5b	CL$960.8b	CL$1.02t	CL$1.08t	CL$1.14t	CL$1.20t	CL$1.27t
Growth Rate Estimate Source	Analyst x1	Analyst x1	Est @ 6.51%	Est @ 6.20%	Est @ 5.99%	Est @ 5.84%	Est @ 5.74%	Est @ 5.66%	Est @ 5.61%	Est @ 5.57%
Present Value (CLP, Millions) Discounted @ 11%	CL$669.2k	CL$650.1k	CL$623.6k	CL$596.5k	CL$569.4k	CL$542.8k	CL$517.0k	CL$492.0k	CL$468.0k	CL$445.0k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CL$5.6t

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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 (5.5%) 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 11%.

Terminal Value (TV)= FCF₂₀₃₅ × (1 + g) ÷ (r – g) = CL$1.3t× (1 + 5.5%) ÷ (11%– 5.5%) = CL$24t

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CL$24t÷ ( 1 + 11%)¹⁰= CL$8.5t

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 CL$14t. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of CL$2.9k, the company appears quite good value at a 42% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

Important Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the 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 Cencosud 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 11%, which is based on a levered beta of 1.014. 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 Cencosud

SWOT Analysis for Cencosud

Looking Ahead:

Valuation is only one side of the coin in terms of building your investment thesis, and it 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. 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. Why is the intrinsic value higher than the current share price? For Cencosud, we've compiled three additional elements you should further research:

1. Risks: Case in point, we've spotted 1 warning sign for Cencosud you should be aware of.
2. Future Earnings: How does CENCOSUD'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.
3. 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!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the SNSE every day. If you want to find the calculation for other stocks just search here.

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This 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.