Broadpeak Société anonyme's (EPA:ALBPK) Intrinsic Value Is Potentially 95% Above Its Share Price

Key Insights

• Broadpeak Société anonyme's estimated fair value is €3.16 based on 2 Stage Free Cash Flow to Equity
• Broadpeak Société anonyme's €1.63 share price signals that it might be 49% undervalued
• When compared to theindustry average discount to fair value of 41%, Broadpeak Société anonyme's competitors seem to be trading at a lesser discount

Does the September share price for Broadpeak Société anonyme (EPA:ALBPK) reflect what it's really worth? Today, we will estimate the stock's intrinsic value 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. Don't get put off by the jargon, the math behind it is actually quite straightforward.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. 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 Broadpeak Société anonyme

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

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) estimate

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (€, Millions)	-€1.60m	€1.70m	€1.93m	€2.11m	€2.27m	€2.39m	€2.49m	€2.57m	€2.64m	€2.70m
Growth Rate Estimate Source	Analyst x2	Analyst x2	Est @ 13.36%	Est @ 9.72%	Est @ 7.18%	Est @ 5.40%	Est @ 4.15%	Est @ 3.28%	Est @ 2.67%	Est @ 2.24%
Present Value (€, Millions) Discounted @ 6.6%	-€1.5	€1.5	€1.6	€1.6	€1.6	€1.6	€1.6	€1.5	€1.5	€1.4

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = €13m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 1.2%. We discount the terminal cash flows to today's value at a cost of equity of 6.6%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = €2.7m× (1 + 1.2%) ÷ (6.6%– 1.2%) = €51m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= €51m÷ ( 1 + 6.6%)¹⁰= €27m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is €40m. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of €1.6, the company appears quite good value at a 49% 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.

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. 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 Broadpeak 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 6.6%, which is based on a levered beta of 1.133. 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 shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. 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. 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. Can we work out why the company is trading at a discount to intrinsic value? For Broadpeak Société anonyme, we've put together three important items you should assess:

1. Risks: As an example, we've found 2 warning signs for Broadpeak Société anonyme (1 shouldn't be ignored!) that you need to consider before investing here.
2. Future Earnings: How does ALBPK'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.