How far off is Motor Oil (Hellas) Corinth Refineries S.A. (ATH:MOH) from its intrinsic value? Using the most recent financial data, we’ll take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!
Remember though, that there are many ways to estimate a company’s value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
What’s the estimated valuation?
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. To start off with, we need to estimate the next ten years of cash flows. 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 need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) estimate
|Levered FCF (€, Millions)||€136.2m||€219.9m||€290.2m||€360.1m||€427.0m||€489.8m||€548.6m||€604.0m||€657.1m||€708.6m|
|Growth Rate Estimate Source||Analyst x3||Analyst x2||Est @ 32%||Est @ 24.1%||Est @ 18.58%||Est @ 14.71%||Est @ 12%||Est @ 10.1%||Est @ 8.78%||Est @ 7.85%|
|Present Value (€, Millions) Discounted @ 29%||€105||€131||€134||€129||€118||€104||€90.4||€77.0||€64.7||€53.9|
(“Est” = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = €1.0b
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 5.7%. We discount the terminal cash flows to today’s value at a cost of equity of 29%.
Terminal Value (TV)= FCF2030 × (1 + g) ÷ (r – g) = €709m× (1 + 5.7%) ÷ (29%– 5.7%) = €3.2b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= €3.2b÷ ( 1 + 29%)10= €241m
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is €1.2b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of €12.3, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula – garbage in, garbage out.
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. Part of investing is coming up with your own evaluation of a company’s future performance, so try the calculation yourself and check your own 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 Motor Oil (Hellas) Corinth Refineries 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 29%, which is based on a levered beta of 1.663. 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.
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. DCF models are not the be-all and end-all of investment valuation. 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. For Motor Oil (Hellas) Corinth Refineries, we’ve compiled three pertinent elements you should assess:
- Risks: You should be aware of the 4 warning signs for Motor Oil (Hellas) Corinth Refineries (1 is a bit unpleasant!) we’ve uncovered before considering an investment in the company.
- Future Earnings: How does MOH’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. 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. 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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