Is Groupe Berkem Société anonyme (EPA:ALKEM) Trading At A 45% Discount?

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Groupe Berkem Société anonyme fair value estimate is €7.86
• Current share price of €4.33 suggests Groupe Berkem Société anonyme is potentially 45% undervalued
• The €8.07 analyst price target for ALKEM is 2.7% more than our estimate of fair value

In this article we are going to estimate the intrinsic value of Groupe Berkem Société anonyme (EPA:ALKEM) by taking the expected future cash flows and discounting them to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. It may sound complicated, but actually it is quite simple!

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

View our latest analysis for Groupe Berkem Société anonyme

Is Groupe Berkem Société anonyme Fairly Valued?

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 begin with, we have to get estimates of 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

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (€, Millions)	€5.40m	€6.80m	€8.05m	€9.11m	€9.95m	€10.6m	€11.1m	€11.5m	€11.9m	€12.1m
Growth Rate Estimate Source	Analyst x3	Est @ 25.99%	Est @ 18.38%	Est @ 13.05%	Est @ 9.32%	Est @ 6.71%	Est @ 4.88%	Est @ 3.60%	Est @ 2.71%	Est @ 2.08%
Present Value (€, Millions) Discounted @ 8.0%	€5.0	€5.8	€6.4	€6.7	€6.8	€6.7	€6.5	€6.3	€5.9	€5.6

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = €62m

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 0.6%. We discount the terminal cash flows to today's value at a cost of equity of 8.0%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = €12m× (1 + 0.6%) ÷ (8.0%– 0.6%) = €166m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= €166m÷ ( 1 + 8.0%)¹⁰= €77m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is €139m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of €4.3, the company appears quite undervalued at a 45% discount to where the stock price trades currently. 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

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 Groupe Berkem Société anonyme 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 8.0%, which is based on a levered beta of 1.081. 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.

Next Steps:

Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. What is the reason for the share price sitting below the intrinsic value? For Groupe Berkem Société anonyme, we've put together three relevant items you should further research:

1. Risks: Case in point, we've spotted 2 warning signs for Groupe Berkem Société anonyme you should be aware of, and 1 of them doesn't sit too well with us.
2. Future Earnings: How does ALKEM'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: Do you like a good all-rounder? 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 valuation for every stock on the ENXTPA every day. If you want to find the calculation for other stocks 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.