Elis SA (EPA:ELIS) Is Trading At A 33.75% Discount

In this article I am going to calculate the intrinsic value of Elis SA (EPA:ELIS) by taking the foreast future cash flows of the company and discounting them back to today’s value. This is done 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. Please also note that this article was written in January 2019 so be sure check out the updated calculation by following the link below.

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Is ELIS fairly valued?

I’m 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 perpetual stable growth rate. 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. I then discount this to its value today and sum up the total to get the present value of these cash flows.

5-year cash flow estimate

2019 2020 2021 2022 2023
Levered FCF (€, Millions) €231.54 €326.12 €381.51 €446.32 €517.73
Source Analyst x8 Analyst x9 Est @ 16.99% Est @ 16.99% Est @ 16%, capped from 16.99%
Present Value Discounted @ 10.13% €210.23 €268.87 €285.59 €303.35 €319.51

Present Value of 5-year Cash Flow (PVCF)= €1.4b

After calculating the present value of future cash flows in the intial 5-year period we need to calculate the Terminal Value, which accounts for all the future cash flows beyond the first stage. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 0.8%. We discount this to today’s value at a cost of equity of 10.1%.

Terminal Value (TV) = FCF2023 × (1 + g) ÷ (r – g) = €518m × (1 + 0.8%) ÷ (10.1% – 0.8%) = €5.6b

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = €5.6b ÷ ( 1 + 10.1%)5 = €3.4b

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is €4.8b. In the final step we divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) or ADR then we use the equivalent number. This results in an intrinsic value of €21.96. Relative to the current share price of €14.55, the stock is quite undervalued at a 34% discount to what it is available for right now.

ENXTPA:ELIS Intrinsic Value Export January 14th 19
ENXTPA:ELIS Intrinsic Value Export January 14th 19

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 my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at Elis 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 10.1%, which is based on a levered beta of 1.015. 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:

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. What is the reason for the share price to differ from the intrinsic value? For ELIS, there are three important factors you should look at:

  1. Financial Health: Does ELIS 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.
  2. Future Earnings: How does ELIS’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: Are there other high quality stocks you could be holding instead of ELIS? 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 does a DCF calculation for every FR stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.