A Look At The Intrinsic Value Of Sato office and Houseware supplies S.A. (ATH:SATOK)

Key Insights

• Sato office and Houseware supplies' estimated fair value is €0.024 based on 2 Stage Free Cash Flow to Equity
• With €0.025 share price, Sato office and Houseware supplies appears to be trading close to its estimated fair value
• Industry average of 5.6% suggests Sato office and Houseware supplies' peers are currently trading at a lower premium to fair value

Does the April share price for Sato office and Houseware supplies S.A. (ATH:SATOK) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the forecast future cash flows of the company and discounting them back to today's value. This will be done using the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.

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.

View our latest analysis for Sato office and Houseware supplies

What's The Estimated Valuation?

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 need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) forecast

	2023	2024	2025	2026	2027	2028	2029	2030	2031	2032
Levered FCF (€, Millions)	€437.6k	€411.8k	€397.9k	€391.5k	€390.0k	€391.8k	€396.0k	€402.0k	€409.1k	€417.3k
Growth Rate Estimate Source	Est @ -9.47%	Est @ -5.88%	Est @ -3.38%	Est @ -1.62%	Est @ -0.39%	Est @ 0.47%	Est @ 1.07%	Est @ 1.50%	Est @ 1.79%	Est @ 2.00%
Present Value (€, Millions) Discounted @ 27%	€0.3	€0.3	€0.2	€0.2	€0.1	€0.09	€0.08	€0.06	€0.05	€0.04

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = €1.4m

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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 2.5%. We discount the terminal cash flows to today's value at a cost of equity of 27%.

Terminal Value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = €417k× (1 + 2.5%) ÷ (27%– 2.5%) = €1.8m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= €1.8m÷ ( 1 + 27%)¹⁰= €164k

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is €1.5m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of €0.03, the company appears around fair value at the time of writing. 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.

Important 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 Sato office and Houseware supplies 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 27%, 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.

Next Steps:

Although the valuation of a company is important, it shouldn't be the only metric you look at when researching 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?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Sato office and Houseware supplies, we've compiled three fundamental aspects you should assess:

1. Risks: To that end, you should learn about the 4 warning signs we've spotted with Sato office and Houseware supplies (including 3 which don't sit too well with us) .
2. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
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. Simply Wall St updates its DCF calculation for every Greek stock every day, so if you want to find the intrinsic value of any other stock 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.