A Look At The Intrinsic Value Of Centrale d'Achat Française pour l'Outre-Mer Société Anonyme (EPA:CAFO)

Key Insights

• The projected fair value for Centrale d'Achat Française pour l'Outre-Mer Société Anonyme is €9.80 based on 2 Stage Free Cash Flow to Equity
• Current share price of €8.48 suggests Centrale d'Achat Française pour l'Outre-Mer Société Anonyme is potentially trading close to its fair value
• When compared to theindustry average discount to fair value of 23%, Centrale d'Achat Française pour l'Outre-Mer Société Anonyme's competitors seem to be trading at a greater discount

Today we will run through one way of estimating the intrinsic value of Centrale d'Achat Française pour l'Outre-Mer Société Anonyme (EPA:CAFO) by taking the expected future cash flows and discounting them to their present value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

View our latest analysis for Centrale d'Achat Française pour l'Outre-Mer Société Anonyme

The Calculation

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. In the first stage we need to estimate the cash flows to the business over the next ten years. 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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) forecast

	2023	2024	2025	2026	2027	2028	2029	2030	2031	2032
Levered FCF (€, Millions)	€12.0m	€12.3m	€12.4m	€12.6m	€12.7m	€12.8m	€12.9m	€13.0m	€13.0m	€13.1m
Growth Rate Estimate Source	Est @ 2.22%	Est @ 1.71%	Est @ 1.35%	Est @ 1.10%	Est @ 0.93%	Est @ 0.80%	Est @ 0.72%	Est @ 0.66%	Est @ 0.62%	Est @ 0.59%
Present Value (€, Millions) Discounted @ 14%	€10.6	€9.4	€8.4	€7.4	€6.6	€5.8	€5.1	€4.5	€4.0	€3.5

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = €65m

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) = €13m× (1 + 0.5%) ÷ (14%– 0.5%) = €97m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= €97m÷ ( 1 + 14%)¹⁰= €26m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is €91m. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of €8.5, the company appears about fair value at a 13% 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. 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 Centrale d'Achat Française pour l'Outre-Mer 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 14%, which is based on a levered beta of 2.000. 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 Centrale d'Achat Française pour l'Outre-Mer Société Anonyme

Next Steps:

Whilst important, the DCF calculation 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 Centrale d'Achat Française pour l'Outre-Mer Société Anonyme, there are three essential items you should look at:

1. Risks: For example, we've discovered 3 warning signs for Centrale d'Achat Française pour l'Outre-Mer Société Anonyme (1 makes us a bit uncomfortable!) that you should be aware of before investing here.
2. 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!
3. Other Top Analyst Picks: Interested to see what the analysts are thinking? Take a look at our interactive list of analysts' top stock picks to find out what they feel might have an attractive future outlook!

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.