Is Iervolino & Lady Bacardi Entertainment S.p.A. (BIT:IE) Trading At A 43% Discount?

Key Insights

• The projected fair value for Iervolino & Lady Bacardi Entertainment is €1.59 based on 2 Stage Free Cash Flow to Equity
• Current share price of €0.90 suggests Iervolino & Lady Bacardi Entertainment is potentially 43% undervalued
• Peers of Iervolino & Lady Bacardi Entertainment are currently trading on average at a 690% premium

Today we will run through one way of estimating the intrinsic value of Iervolino & Lady Bacardi Entertainment S.p.A. (BIT:IE) by projecting its future cash flows and then discounting them to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

See our latest analysis for Iervolino & Lady Bacardi Entertainment

Crunching The Numbers

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 begin with, we have to get estimates of 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) forecast

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (€, Millions)	€6.80m	€8.10m	€9.06m	€9.88m	€10.6m	€11.1m	€11.6m	€12.1m	€12.5m	€12.8m
Growth Rate Estimate Source	Analyst x2	Analyst x2	Est @ 11.89%	Est @ 8.97%	Est @ 6.92%	Est @ 5.49%	Est @ 4.49%	Est @ 3.79%	Est @ 3.30%	Est @ 2.95%
Present Value (€, Millions) Discounted @ 19%	€5.7	€5.7	€5.4	€5.0	€4.5	€4.0	€3.5	€3.0	€2.6	€2.3

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = €42m

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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 (2.2%) 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 19%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = €13m× (1 + 2.2%) ÷ (19%– 2.2%) = €79m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= €79m÷ ( 1 + 19%)¹⁰= €14m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is €56m. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of €0.9, the company appears quite good value at a 43% 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

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 Iervolino & Lady Bacardi Entertainment 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 19%, which is based on a levered beta of 2.000. 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 Iervolino & Lady Bacardi Entertainment

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. 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. Can we work out why the company is trading at a discount to intrinsic value? For Iervolino & Lady Bacardi Entertainment, we've put together three fundamental factors you should further examine:

1. Risks: For example, we've discovered 5 warning signs for Iervolino & Lady Bacardi Entertainment (1 doesn't sit too well with us!) that you should be aware of before investing here.
2. Future Earnings: How does IE'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 Italian 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. 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.