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HELLENiQ ENERGY Holdings S.A.'s (ATH:ELPE) Intrinsic Value Is Potentially 18% Below Its Share Price
Key Insights
- HELLENiQ ENERGY Holdings' estimated fair value is €5.55 based on 2 Stage Free Cash Flow to Equity
- Current share price of €6.80 suggests HELLENiQ ENERGY Holdings is potentially 22% overvalued
- The €8.42 analyst price target for ELPE is 52% more than our estimate of fair value
Today we'll do a simple run through of a valuation method used to estimate the attractiveness of HELLENiQ ENERGY Holdings S.A. (ATH:ELPE) as an investment opportunity by projecting its future cash flows and then discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.
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.
View our latest analysis for HELLENiQ ENERGY Holdings
Crunching The Numbers
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. 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.
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) estimate
2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | |
Levered FCF (€, Millions) | €76.8m | €296.7m | €229.0m | €235.0m | €240.6m | €246.4m | €252.4m | €258.6m | €264.9m | €271.3m |
Growth Rate Estimate Source | Analyst x3 | Analyst x3 | Analyst x1 | Analyst x1 | Est @ 2.40% | Est @ 2.41% | Est @ 2.42% | Est @ 2.43% | Est @ 2.44% | Est @ 2.44% |
Present Value (€, Millions) Discounted @ 15% | €66.9 | €225 | €151 | €135 | €121 | €108 | €95.9 | €85.6 | €76.4 | €68.1 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = €1.1b
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. 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 (2.5%) 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 15%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = €271m× (1 + 2.5%) ÷ (15%– 2.5%) = €2.2b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= €2.2b÷ ( 1 + 15%)10= €564m
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 €1.7b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of €6.8, the company appears slightly overvalued at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.
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 HELLENiQ ENERGY Holdings 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 15%, which is based on a levered beta of 1.723. 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 HELLENiQ ENERGY Holdings
- Debt is well covered by earnings.
- Dividend is in the top 25% of dividend payers in the market.
- Earnings declined over the past year.
- Expensive based on P/E ratio and estimated fair value.
- ELPE's financial characteristics indicate limited near-term opportunities for shareholders.
- Debt is not well covered by operating cash flow.
- Dividends are not covered by cash flow.
- Annual earnings are forecast to decline for the next 3 years.
Moving On:
Although the valuation of a company is important, 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 example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. What is the reason for the share price exceeding the intrinsic value? For HELLENiQ ENERGY Holdings, we've put together three essential aspects you should explore:
- Risks: Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with HELLENiQ ENERGY Holdings (at least 2 which are potentially serious) , and understanding these should be part of your investment process.
- Future Earnings: How does ELPE'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.
- 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 ATSE every day. If you want to find the calculation for other stocks just search here.
Valuation is complex, but we're here to simplify it.
Discover if HELLENiQ ENERGY Holdings might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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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.
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About ATSE:ELPE
HELLENiQ ENERGY Holdings
Operates in the energy sector primarily in Greece, the Southeastern Europe, and the East Mediterranean.
Adequate balance sheet second-rate dividend payer.