MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság's (BUSE:MOL) Intrinsic Value Is Potentially 31% Above Its Share Price

In this article we are going to estimate the intrinsic value of MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság (BUSE:MOL) by taking the expected future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Don't get put off by the jargon, the math behind it is actually quite straightforward.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

See our latest analysis for MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság

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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, 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

	2022	2023	2024	2025	2026	2027	2028	2029	2030	2031
Levered FCF (HUF, Millions)	Ft276.2b	Ft286.4b	Ft242.2b	Ft258.1b	Ft261.1b	Ft257.8b	Ft256.5b	Ft256.4b	Ft257.2b	Ft258.7b
Growth Rate Estimate Source	Analyst x5	Analyst x5	Analyst x5	Analyst x5	Analyst x5	Est @ -1.26%	Est @ -0.53%	Est @ -0.03%	Est @ 0.32%	Est @ 0.57%
Present Value (HUF, Millions) Discounted @ 12%	Ft245.7k	Ft226.6k	Ft170.5k	Ft161.6k	Ft145.4k	Ft127.7k	Ft113.0k	Ft100.5k	Ft89.7k	Ft80.2k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = Ft1.5t

The second stage is also known as Terminal Value, this is the business's cash flow after 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 (1.2%) 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 12%.

Terminal Value (TV)= FCF₂₀₃₁ × (1 + g) ÷ (r – g) = Ft259b× (1 + 1.2%) ÷ (12%– 1.2%) = Ft2.3t

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= Ft2.3t÷ ( 1 + 12%)¹⁰= Ft720b

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 Ft2.2t. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of Ft2.7k, the company appears a touch undervalued at a 24% discount to where the stock price trades currently. 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. 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 MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság 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 12%, which is based on a levered beta of 1.809. 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.

Moving On:

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. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Can we work out why the company is trading at a discount to intrinsic value? For MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság, we've compiled three relevant aspects you should further research:

1. Risks: To that end, you should learn about the 2 warning signs we've spotted with MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság (including 1 which can't be ignored) .
2. Future Earnings: How does MOL'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 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!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the BUSE 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.