Stock Analysis

# A Look At The Intrinsic Value Of PATRIZIA SE (ETR:PAT)

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of PATRIZIA SE (ETR:PAT) as an investment opportunity by taking the expected future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. 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.

Check out our latest analysis for PATRIZIA

## Step By Step Through The Calculation

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. To start off with, we need to estimate 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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:

#### 10-year free cash flow (FCF) estimate

 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 Levered FCF (€, Millions) €57.9m €73.4m €69.4m €66.7m €64.9m €63.8m €63.0m €62.5m €62.2m €62.0m Growth Rate Estimate Source Analyst x3 Analyst x3 Est @ -5.56% Est @ -3.84% Est @ -2.64% Est @ -1.80% Est @ -1.21% Est @ -0.80% Est @ -0.51% Est @ -0.31% Present Value (€, Millions) Discounted @ 6.8% €54.2 €64.3 €56.9 €51.2 €46.6 €42.9 €39.6 €36.8 €34.3 €32.0

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = €459m

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 0.2%. We discount the terminal cash flows to today's value at a cost of equity of 6.8%.

Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = €62m× (1 + 0.2%) ÷ (6.8%– 0.2%) = €928m

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= €928m÷ ( 1 + 6.8%)10= €479m

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 €937m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of €11.2, 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.

## The 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. 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 PATRIZIA 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 6.8%, which is based on a levered beta of 1.126. 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 PATRIZIA

Strength
• Earnings growth over the past year exceeded the industry.
• Debt is well covered by cash flow.
• Dividends are covered by earnings and cash flows.
Weakness
• Interest payments on debt are not well covered.
• Dividend is low compared to the top 25% of dividend payers in the Real Estate market.
• Expensive based on P/E ratio and estimated fair value.
Opportunity
• Annual earnings are forecast to grow faster than the German market.
Threat
• Annual revenue is forecast to grow slower than the German market.

## Next Steps:

Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. It's not possible to obtain a foolproof valuation with a DCF model. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For PATRIZIA, we've compiled three important aspects you should further research:

1. Risks: To that end, you should be aware of the 2 warning signs we've spotted with PATRIZIA .
2. Future Earnings: How does PAT'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 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!

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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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.