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Estimating The Fair Value Of DEAG Deutsche Entertainment Aktiengesellschaft (HMSE:LOU)
Key Insights
- The projected fair value for DEAG Deutsche Entertainment is €4.49 based on 2 Stage Free Cash Flow to Equity
- DEAG Deutsche Entertainment's €4.32 share price indicates it is trading at similar levels as its fair value estimate
- Peers of DEAG Deutsche Entertainment are currently trading on average at a 21% premium
Today we will run through one way of estimating the intrinsic value of DEAG Deutsche Entertainment Aktiengesellschaft (HMSE:LOU) by projecting its future cash flows and then discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
Check out our latest analysis for DEAG Deutsche Entertainment
The Model
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 begin with, we have to get estimates of 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 need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) estimate
2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | |
Levered FCF (€, Millions) | €11.6m | €8.88m | €7.43m | €6.60m | €6.10m | €5.80m | €5.60m | €5.49m | €5.42m | €5.39m |
Growth Rate Estimate Source | Est @ -34.08% | Est @ -23.61% | Est @ -16.29% | Est @ -11.16% | Est @ -7.57% | Est @ -5.05% | Est @ -3.30% | Est @ -2.06% | Est @ -1.20% | Est @ -0.60% |
Present Value (€, Millions) Discounted @ 6.9% | €10.9 | €7.8 | €6.1 | €5.1 | €4.4 | €3.9 | €3.5 | €3.2 | €3.0 | €2.8 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = €51m
We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 0.8%. We discount the terminal cash flows to today's value at a cost of equity of 6.9%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = €5.4m× (1 + 0.8%) ÷ (6.9%– 0.8%) = €90m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= €90m÷ ( 1 + 6.9%)10= €46m
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is €97m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of €4.3, the company appears about fair value at a 3.7% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.
Important Assumptions
Now 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 DEAG Deutsche Entertainment 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 6.9%, which is based on a levered beta of 1.469. 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:
Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize 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 DEAG Deutsche Entertainment, we've compiled three fundamental elements you should assess:
- Risks: To that end, you should be aware of the 1 warning sign we've spotted with DEAG Deutsche Entertainment .
- 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!
- 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 German stock every day, so if you want to find the intrinsic value of any other stock just search here.
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Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
About HMSE:LOU
DEAG Deutsche Entertainment
A live entertainment service company, produces and organizes various events and concerts primarily in Germany, the United Kingdom, Switzerland, Ireland, Spain, and Denmark.
Mediocre balance sheet and slightly overvalued.