An Intrinsic Calculation For Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság (BUSE:MTELEKOM) Suggests It's 42% Undervalued

Key Insights

• The projected fair value for Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság is Ft1,757 based on 2 Stage Free Cash Flow to Equity
• Current share price of Ft1,022 suggests Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság is potentially 42% undervalued
• Analyst price target for MTELEKOM is Ft1,015 which is 42% below our fair value estimate

In this article we are going to estimate the intrinsic value of Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság (BUSE:MTELEKOM) 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. 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. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

Check out our latest analysis for Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság

The Model

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. 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.

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

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = Ft767b

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 4.9%. We discount the terminal cash flows to today's value at a cost of equity of 11%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = Ft136b× (1 + 4.9%) ÷ (11%– 4.9%) = Ft2.4t

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= Ft2.4t÷ ( 1 + 11%)¹⁰= Ft867b

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 Ft1.6t. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of Ft1.0k, the company appears quite good value at a 42% 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.

Important Assumptions

We would point out that 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 Magyar Telekom Távközlési Nyilvánosan Müködö 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 11%, which is based on a levered beta of 0.800. 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 Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság

Next Steps:

Although the valuation of a company is important, it is only one of many factors that you need to assess for a company. It's not possible to obtain a foolproof valuation with a DCF model. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" 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 Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság, we've put together three pertinent factors you should consider:

1. Risks: For example, we've discovered 1 warning sign for Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság that you should be aware of before investing here.
2. Future Earnings: How does MTELEKOM'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. 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.