Is Colt CZ Group SE (SEP:CZG) Trading At A 46% Discount?

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Colt CZ Group fair value estimate is Kč1,259
• Colt CZ Group's Kč685 share price signals that it might be 46% undervalued
• Colt CZ Group's peers are currently trading at a premium of 395% on average

Does the May share price for Colt CZ Group SE (SEP:CZG) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the forecast future cash flows of the company and discounting them back 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.

See our latest analysis for Colt CZ Group

What's The Estimated Valuation?

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.

Generally we assume that a dollar today is more valuable than a dollar in the future, 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) forecast

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (CZK, Millions)	Kč1.55b	Kč1.31b	Kč1.81b	Kč2.16b	Kč2.47b	Kč2.73b	Kč2.96b	Kč3.17b	Kč3.34b	Kč3.50b
Growth Rate Estimate Source	Analyst x1	Analyst x1	Analyst x1	Est @ 19.18%	Est @ 14.29%	Est @ 10.86%	Est @ 8.46%	Est @ 6.79%	Est @ 5.61%	Est @ 4.79%
Present Value (CZK, Millions) Discounted @ 8.4%	Kč1.4k	Kč1.1k	Kč1.4k	Kč1.6k	Kč1.6k	Kč1.7k	Kč1.7k	Kč1.7k	Kč1.6k	Kč1.6k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = Kč15b

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. 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 2.9%. We discount the terminal cash flows to today's value at a cost of equity of 8.4%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = Kč3.5b× (1 + 2.9%) ÷ (8.4%– 2.9%) = Kč65b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= Kč65b÷ ( 1 + 8.4%)¹⁰= Kč29b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is Kč44b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of Kč685, the company appears quite undervalued at a 46% 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.

The Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual 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 Colt CZ Group 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 8.4%, 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.

SWOT Analysis for Colt CZ Group

Looking Ahead:

Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. DCF models are not the be-all and end-all of investment valuation. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or 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. Why is the intrinsic value higher than the current share price? For Colt CZ Group, there are three fundamental items you should consider:

1. Risks: For example, we've discovered 2 warning signs for Colt CZ Group (1 makes us a bit uncomfortable!) that you should be aware of before investing here.
2. Future Earnings: How does CZG'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. Simply Wall St updates its DCF calculation for every Czech 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.