MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság's (BUSE:MOL) Intrinsic Value Is Potentially 70% Above Its Share Price

Key Insights

• MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság's estimated fair value is Ft5,050 based on 2 Stage Free Cash Flow to Equity
• MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság's Ft2,972 share price signals that it might be 41% undervalued
• Analyst price target for MOL is Ft3,309 which is 34% below our fair value estimate

How far off is MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság (BUSE:MOL) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by projecting its future cash flows and then discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

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.

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

The Model

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

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = Ft2.2t

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 (4.7%) 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 16%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = Ft470b× (1 + 4.7%) ÷ (16%– 4.7%) = Ft4.4t

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= Ft4.4t÷ ( 1 + 16%)¹⁰= Ft1.0t

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is Ft3.2t. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of Ft3.0k, the company appears quite good value at a 41% discount to where the stock price trades currently. 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.

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 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 16%, which is based on a levered beta of 1.502. 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 MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság

Next Steps:

Whilst important, the DCF calculation 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. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Why is the intrinsic value higher than the current share price? For MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság, there are three essential elements 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 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 Hungarian stock every day, so if you want to find the intrinsic value of any other stock just search here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.