The calculation
I use what is known as a 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the first stage is higher growth, and the second stage is a more stable growth phase. To begin with we have to get estimates of the next five years of cash flows. Where possible I use analyst estimates, but when these aren’t available I have extrapolated the previous free cash flow (FCF) from the year before. For this growth rate I used the average annual growth rate over the past five years, but capped at a reasonable level. The sum of these cash flows is then discounted to today’s value.
5-year cash flow estimate
2018 | 2019 | 2020 | 2021 | 2022 | |
Levered FCF (€, Millions) | €29.70 | €24.70 | €25.05 | €25.40 | €25.75 |
Source | Analyst x1 | Analyst x1 | Extrapolated @ (1.4%) | Extrapolated @ (1.4%) | Extrapolated @ (1.4%) |
Present Value Discounted @ 8.16% | €27.46 | €21.12 | €19.80 | €18.56 | €17.40 |
Present Value of 5-year Cash Flow (PVCF)= €104.33
The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage. 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 (0.8%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 8.2%.
Terminal Value (TV) = FCF_{2022} × (1 + g) ÷ (r – g) = €25.75 × (1 + 0.8%) ÷ (8.2% – 0.8%) = €351.77
Present Value of Terminal Value (PVTV) = TV / (1 + r)^{5} = €351.77 / ( 1 + 8.2%)^{5} = €237.69
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is €342.02. 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 €79.71. Relative to the current share price of €49.6, the stock is quite good value at a 37.78% discount to what it is available for right now.
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 my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Fleury Michon 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 8.2%, 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:
Although the valuation of a company is important, 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 FLE, I’ve compiled three fundamental factors you should look at:
- Financial Health: Does FLE 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 FLE’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 FLE? 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.