Stock Analysis

# Calculating The Fair Value Of Viña San Pedro Tarapacá S.A. (SNSE:VSPT)

Published

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Viña San Pedro Tarapacá S.A. (SNSE:VSPT) as an investment opportunity by taking the expected future cash flows and discounting them to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

View our latest analysis for Viña San Pedro Tarapacá

## The Method

As Viña San Pedro Tarapacá operates in the beverage sector, we need to calculate the intrinsic value slightly differently. In this approach dividends per share (DPS) are used, as free cash flow is difficult to estimate and often not reported by analysts. This often underestimates the value of a stock, but it can still be good as a comparison to competitors. We use the Gordon Growth Model, which assumes dividend will grow into perpetuity at a rate that can be sustained. For a number of reasons a very conservative growth rate is used that cannot exceed that of a company's Gross Domestic Product (GDP). In this case we used the 5-year average of the 10-year government bond yield (8.2%). The expected dividend per share is then discounted to today's value at a cost of equity of 14%. Compared to the current share price of CL\$5.0, the company appears around fair value at the time of writing. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

Value Per Share = Expected Dividend Per Share / (Discount Rate - Perpetual Growth Rate)

= CL\$0.4 / (14% – 8.2%)

= CL\$4.8

## Important Assumptions

We would 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 these inputs, I recommend redoing the calculations yourself and playing with them. 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 Viña San Pedro Tarapacá 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 14%, which is based on a levered beta of 0.800. 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.

### SWOT Analysis for Viña San Pedro Tarapacá

Strength
• Earnings growth over the past year exceeded the industry.
• Debt is well covered by earnings.
Weakness
• Dividend is low compared to the top 25% of dividend payers in the Beverage market.
• Current share price is above our estimate of fair value.
Opportunity
• VSPT's financial characteristics indicate limited near-term opportunities for shareholders.
• Lack of analyst coverage makes it difficult to determine VSPT's earnings prospects.
Threat
• Debt is not well covered by operating cash flow.
• Paying a dividend but company has no free cash flows.

## Moving On:

Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" 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. For Viña San Pedro Tarapacá, we've put together three fundamental aspects you should consider:

1. Risks: You should be aware of the 2 warning signs for Viña San Pedro Tarapacá we've uncovered before considering an investment in the company.
2. 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!
3. Other Top Analyst Picks: Interested to see what the analysts are thinking? Take a look at our interactive list of analysts' top stock picks to find out what they feel might have an attractive future outlook!

PS. Simply Wall St updates its DCF calculation for every Chilean stock every day, so if you want to find the intrinsic value of any other stock just search here.

### Valuation is complex, but we're helping make it simple.

Find out whether Viña San Pedro Tarapacá is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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