Investors Are Undervaluing Gr Sarantis S.A. (ATH:SAR) By 29%

In this article I am going to calculate the intrinsic value of Gr Sarantis S.A. (ATSE:SAR) by taking the foreast future cash flows of the company and discounting them back to today’s value. This is done using the Discounted Cash Flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model. Please also note that this article was written in April 2018 so be sure check out the updated calculation by following the link below. See our latest analysis for Gr. Sarantis

The model

I use what is known as a 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the first stage is higher growth, and the second stage is a more stable growth phase. In the first stage we need to estimate the cash flows to the business over the next five years. Where possible I use analyst estimates, but when these aren’t available I have extrapolated the previous free cash flow (FCF) from the year before. For this growth rate I used the average annual growth rate over the past five years, but capped at a reasonable level. The sum of these cash flows is then discounted to today’s value.

5-year cash flow forecast

2018 2019 2020 2021 2022
Levered FCF (€, Millions) €23.90 €28.30 €31.10 €34.17 €37.54
Source Analyst x1 Analyst x1 Extrapolated @ (9.88%) Extrapolated @ (9.88%) Extrapolated @ (9.88%)
Present Value Discounted @ 8.85% €21.96 €23.89 €24.11 €24.34 €24.57

Present Value of 5-year Cash Flow (PVCF)= €119

After calculating the present value of future cash flows in the intial 5-year period we need to calculate the Terminal Value, which accounts for all the future cash flows beyond the first stage. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 4.2%. We discount this to today’s value at a cost of equity of 8.8%.

Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = €38 × (1 + 4.2%) ÷ (8.8% – 4.2%) = €848

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = €848 / ( 1 + 8.8%)5 = €555

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is €674. In the final step we divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) or ADR then we use the equivalent number. This results in an intrinsic value of €20.07, which, compared to the current share price of €14.2, we see that Gr. Sarantis is about right, perhaps slightly undervalued at a 29.24% discount to what it is available for right now.

ATSE:SAR Intrinsic Value Apr 12th 18
ATSE:SAR Intrinsic Value Apr 12th 18

The assumptions

Now 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 my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Gr. Sarantis as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 8.8%, which is based on a levered beta of 0.8. This is derived from the Bottom-Up Beta method based on 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. What is the reason for the share price to differ from the intrinsic value? For SAR, I’ve put together three essential factors you should further research:

  1. Financial Health: Does SAR have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
  2. Future Earnings: How does SAR’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: Are there other high quality stocks you could be holding instead of SAR? 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 does a DCF calculation for every GR stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.