Enel Chile S.A. (SNSE:ENELCHILE) Shares Could Be 43% Below Their Intrinsic Value Estimate

Key Insights

• Enel Chile's estimated fair value is CL$66.4 based on 2 Stage Free Cash Flow to Equity
• Current share price of CL$37.8 suggests Enel Chile is 43% undervalued
• Analyst price target for ENELCHILE is CL$44.80 which is 33% below our fair value estimate

In this article we are going to estimate the intrinsic value of Enel Chile S.A. (SNSE:ENELCHILE) by taking the expected future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. There's really not all that much to it, even though it might appear quite complex.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

See our latest analysis for Enel Chile

What's The Estimated Valuation?

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. In the first stage we need to estimate the cash flows to the business over the next ten years. 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 need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) estimate

	2023	2024	2025	2026	2027	2028	2029	2030	2031	2032
Levered FCF (CLP, Millions)	CL$84.4b	CL$155.0b	CL$217.5b	CL$284.0b	CL$351.5b	CL$418.4b	CL$483.9b	CL$548.5b	CL$612.7b	CL$677.3b
Growth Rate Estimate Source	Analyst x1	Analyst x1	Est @ 40.30%	Est @ 30.58%	Est @ 23.77%	Est @ 19.01%	Est @ 15.67%	Est @ 13.34%	Est @ 11.70%	Est @ 10.56%
Present Value (CLP, Millions) Discounted @ 14%	CL$73.8k	CL$118.6k	CL$145.6k	CL$166.3k	CL$180.1k	CL$187.4k	CL$189.7k	CL$188.0k	CL$183.7k	CL$177.7k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CL$1.6t

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 7.9%. We discount the terminal cash flows to today's value at a cost of equity of 14%.

Terminal Value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = CL$677b× (1 + 7.9%) ÷ (14%– 7.9%) = CL$11t

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CL$11t÷ ( 1 + 14%)¹⁰= CL$3.0t

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$4.6t. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of CL$37.8, the company appears quite good value at a 43% discount to where the stock price trades currently. 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.

Important Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 Enel Chile 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 0.918. 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 Enel Chile

Next Steps:

Although the valuation of a company is important, 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. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. What is the reason for the share price sitting below the intrinsic value? For Enel Chile, we've put together three further aspects you should consider:

1. Risks: You should be aware of the 3 warning signs for Enel Chile (1 is significant!) we've uncovered before considering an investment in the company.
2. Future Earnings: How does ENELCHILE'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.