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I am going to run you through how I calculated the intrinsic value of Aena S.M.E., S.A. (BME:AENA) by estimating the company's future cash flows and discounting them to their present value. I will be using the discounted cash flows (DCF) model. It may sound complicated, but actually it is quite simple! If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model. If you are reading this and its not February 2019 then I highly recommend you check out the latest calculation for Aena S.M.E by following the link below.
See our latest analysis for Aena S.M.E
Crunching the numbers
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 five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. The sum of these cash flows is then discounted to today's value.
5-year cash flow forecast
| 2019 | 2020 | 2021 | 2022 | 2023 | |
| Levered FCF (€, Millions) | €1.58k | €1.58k | €1.68k | €1.57k | €1.47k |
| Source | Analyst x15 | Analyst x14 | Analyst x5 | Analyst x3 | Analyst x2 |
| Present Value Discounted @ 8.31% | €1.46k | €1.35k | €1.32k | €1.14k | €985.43 |
Present Value of 5-year Cash Flow (PVCF)= €6.3b
We now need to calculate the Terminal Value, which accounts for all the future cash flows after the five years. For a number of reasons a very conservative growth rate is used that cannot exceed that of the GDP. In this case I have used the 10-year government bond rate (1.5%). In the same way as with the 5-year 'growth' period, we discount this to today's value at a cost of equity of 8.3%.
Terminal Value (TV) = FCF2023 × (1 + g) ÷ (r – g) = €1.5b × (1 + 1.5%) ÷ (8.3% – 1.5%) = €22b
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = €22b ÷ ( 1 + 8.3%)5 = €15b
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is €21b. To get the intrinsic value per share, we divide this by the total number of shares outstanding, or the equivalent number if this is a depositary receipt or ADR. This results in an intrinsic value of €140.1. Relative to the current share price of €153.55, the stock is fair value, maybe slightly overvalued at the time of writing.
The 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 my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Aena S.M.E as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I've used 8.3%, which is based on a levered beta of 0.800. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
Next Steps:
Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company. For AENA, I've put together three pertinent aspects you should further research:
- Financial Health: Does AENA have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
- Future Earnings: How does AENA'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.
- Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of AENA? 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 for every stock on the BME every 6 hours. If you want to find the calculation for other stocks just search here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. On rare occasion, data errors may occur. Thank you for reading.