- Trade Distributors
Calculating The Fair Value Of Rexel S.A. (EPA:RXL)
- Rexel's estimated fair value is €20.67 based on 2 Stage Free Cash Flow to Equity
- Current share price of €22.82 suggests Rexel is potentially trading close to its fair value
- Analyst price target for RXL is €25.25, which is 22% above our fair value estimate
Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Rexel S.A. (EPA:RXL) as an investment opportunity by taking the forecast future cash flows of the company and discounting them back to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.
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. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.
Check out our latest analysis for Rexel
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 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.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) forecast
|Levered FCF (€, Millions)||€632.9m||€657.6m||€592.5m||€574.7m||€563.6m||€556.8m||€553.0m||€551.2m||€550.8m||€551.4m|
|Growth Rate Estimate Source||Analyst x3||Analyst x4||Analyst x2||Est @ -3.00%||Est @ -1.94%||Est @ -1.20%||Est @ -0.69%||Est @ -0.32%||Est @ -0.07%||Est @ 0.11%|
|Present Value (€, Millions) Discounted @ 9.4%||€579||€550||€453||€402||€360||€325||€295||€269||€246||€225|
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = €3.7b
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 0.5%. We discount the terminal cash flows to today's value at a cost of equity of 9.4%.
Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = €551m× (1 + 0.5%) ÷ (9.4%– 0.5%) = €6.3b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= €6.3b÷ ( 1 + 9.4%)10= €2.6b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is €6.3b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of €22.8, 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 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 Rexel 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 9.4%, which is based on a levered beta of 1.303. 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 Rexel
- Earnings growth over the past year exceeded the industry.
- Debt is not viewed as a risk.
- Dividends are covered by earnings and cash flows.
- Dividend is low compared to the top 25% of dividend payers in the Trade Distributors market.
- Good value based on P/E ratio compared to estimated Fair P/E ratio.
- Annual earnings are forecast to decline for the next 3 years.
Valuation is only one side of the coin in terms of building your investment thesis, and 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. 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 Rexel, we've compiled three fundamental items you should look at:
- Risks: For example, we've discovered 2 warning signs for Rexel (1 is a bit concerning!) that you should be aware of before investing here.
- Future Earnings: How does RXL'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 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 French stock every day, so if you want to find the intrinsic value of any other stock just search here.
Valuation is complex, but we're helping make it simple.
Find out whether Rexel is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
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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.
Rexel S.A., together with its subsidiaries, engages in distribution of low and ultra-low voltage electrical products and services for the residential, commercial, and industrial energy markets in France, Europe, North America, and Asia-Pacific.
Flawless balance sheet, undervalued and pays a dividend.