Stock Analysis

Calculating The Fair Value Of Orapi SA (EPA:ORAP)

ENXTPA:ORAP
Source: Shutterstock

Key Insights

  • Using the 2 Stage Free Cash Flow to Equity, Orapi fair value estimate is €4.23
  • Orapi's €4.02 share price indicates it is trading at similar levels as its fair value estimate
  • The average premium for Orapi's competitorsis currently 45%

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Orapi SA (EPA:ORAP) as an investment opportunity by taking the expected future cash flows and discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. It may sound complicated, but actually it is quite simple!

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 Orapi

Step By Step Through The Calculation

We're 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 a stable growth rate. To start off with, we need to estimate the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last 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

2023202420252026202720282029203020312032
Levered FCF (€, Millions) €7.14m€5.14m€4.14m€3.58m€3.25m€3.04m€2.91m€2.83m€2.78m€2.75m
Growth Rate Estimate SourceEst @ -40.26%Est @ -28.03%Est @ -19.46%Est @ -13.47%Est @ -9.27%Est @ -6.33%Est @ -4.28%Est @ -2.84%Est @ -1.83%Est @ -1.13%
Present Value (€, Millions) Discounted @ 14% €6.3€4.0€2.8€2.1€1.7€1.4€1.2€1.0€0.9€0.7

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = €22m

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 a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (0.5%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 14%.

Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = €2.7m× (1 + 0.5%) ÷ (14%– 0.5%) = €21m

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= €21m÷ ( 1 + 14%)10= €5.6m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is €28m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of €4.0, the company appears about fair value at a 4.9% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

dcf
ENXTPA:ORAP Discounted Cash Flow March 30th 2023

The Assumptions

We would point out that 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 these result, have a go at the calculation yourself and play with the assumptions. 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 Orapi 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 14%, which is based on a levered beta of 1.976. 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 Orapi

Strength
  • Debt is well covered by cash flow.
Weakness
  • Earnings declined over the past year.
  • Interest payments on debt are not well covered.
Opportunity
  • Annual earnings are forecast to grow faster than the French market.
  • Current share price is below our estimate of fair value.
Threat
  • No apparent threats visible for ORAP.

Next Steps:

Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize for a company. It's not possible to obtain a foolproof valuation with a DCF model. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Orapi, we've put together three important items you should further research:

  1. Risks: Take risks, for example - Orapi has 4 warning signs we think you should be aware of.
  2. Future Earnings: How does ORAP'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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Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

About ENXTPA:ORAP

Orapi

Designs, manufactures, and sells products and solutions for hygiene and industrial maintenance worldwide.

Excellent balance sheet and good value.

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