Estimating The Intrinsic Value Of Alkis H. Hadjikyriacos (Frou Frou Biscuits) Public Ltd. (CSE:FBI)

Key Insights

• Alkis H. Hadjikyriacos (Frou Frou Biscuits)'s estimated fair value is €0.30 based on 2 Stage Free Cash Flow to Equity
• Current share price of €0.32 suggests Alkis H. Hadjikyriacos (Frou Frou Biscuits) is potentially trading close to its fair value
• Alkis H. Hadjikyriacos (Frou Frou Biscuits)'s peers seem to be trading at a higher premium to fair value based onthe industry average of -192%

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Alkis H. Hadjikyriacos (Frou Frou Biscuits) Public Ltd. (CSE:FBI) as an investment opportunity by projecting its future cash flows and then discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Don't get put off by the jargon, the math behind it is actually quite straightforward.

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. 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.

View our latest analysis for Alkis H. Hadjikyriacos (Frou Frou Biscuits)

Is Alkis H. Hadjikyriacos (Frou Frou Biscuits) Fairly Valued?

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To start off with, we need to estimate the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last 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) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (€, Millions)	€1.99m	€2.05m	€2.11m	€2.16m	€2.20m	€2.24m	€2.28m	€2.32m	€2.36m	€2.39m
Growth Rate Estimate Source	Est @ 3.82%	Est @ 3.12%	Est @ 2.62%	Est @ 2.28%	Est @ 2.04%	Est @ 1.87%	Est @ 1.75%	Est @ 1.66%	Est @ 1.61%	Est @ 1.57%
Present Value (€, Millions) Discounted @ 8.5%	€1.8	€1.7	€1.7	€1.6	€1.5	€1.4	€1.3	€1.2	€1.1	€1.1

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = €14m

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 1.5%. We discount the terminal cash flows to today's value at a cost of equity of 8.5%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = €2.4m× (1 + 1.5%) ÷ (8.5%– 1.5%) = €34m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= €34m÷ ( 1 + 8.5%)¹⁰= €15m

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 €30m. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of €0.3, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

Important Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Alkis H. Hadjikyriacos (Frou Frou Biscuits) 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 8.5%, 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.

Looking Ahead:

Although the valuation of a company is important, it is only one of many factors that you need to assess for a company. It's not possible to obtain a foolproof valuation with a DCF model. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Alkis H. Hadjikyriacos (Frou Frou Biscuits), we've put together three important aspects you should further research:

1. Risks: Case in point, we've spotted 3 warning signs for Alkis H. Hadjikyriacos (Frou Frou Biscuits) you should be aware of, and 2 of them are significant.
2. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
3. Other Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!

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