Are Investors Undervaluing MFE-Mediaforeurope N.V. (BIT:MFEB) By 22%?
Key Insights
- MFE-Mediaforeurope's estimated fair value is €5.87 based on 2 Stage Free Cash Flow to Equity
- MFE-Mediaforeurope is estimated to be 22% undervalued based on current share price of €4.59
- The €4.07 analyst price target for MFEB is 31% less than our estimate of fair value
How far off is MFE-Mediaforeurope N.V. (BIT:MFEB) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. 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. 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.
Check out our latest analysis for MFE-Mediaforeurope
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. 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, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) forecast
2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | |
Levered FCF (€, Millions) | €278.0m | €303.5m | €290.4m | €283.7m | €281.1m | €281.2m | €283.2m | €286.6m | €291.0m | €296.1m |
Growth Rate Estimate Source | Analyst x3 | Analyst x2 | Est @ -4.30% | Est @ -2.32% | Est @ -0.93% | Est @ 0.04% | Est @ 0.72% | Est @ 1.20% | Est @ 1.53% | Est @ 1.77% |
Present Value (€, Millions) Discounted @ 10.0% | €253 | €251 | €218 | €194 | €175 | €159 | €145 | €134 | €124 | €114 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = €1.8b
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 2.3%. We discount the terminal cash flows to today's value at a cost of equity of 10.0%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = €296m× (1 + 2.3%) ÷ (10.0%– 2.3%) = €3.9b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= €3.9b÷ ( 1 + 10.0%)10= €1.5b
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 €3.3b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of €4.6, the company appears a touch undervalued at a 22% 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.
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. 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 MFE-Mediaforeurope 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 10.0%, which is based on a levered beta of 0.983. 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 MFE-Mediaforeurope
- Debt is not viewed as a risk.
- Dividends are covered by earnings and cash flows.
- Dividend is in the top 25% of dividend payers in the market.
- Earnings declined over the past year.
- Shareholders have been diluted in the past year.
- Annual earnings are forecast to grow faster than the Italian market.
- Good value based on P/E ratio and estimated fair value.
- Annual revenue is forecast to grow slower than the Italian market.
Looking Ahead:
Valuation is only one side of the coin in terms of building your investment thesis, and 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. 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. What is the reason for the share price sitting below the intrinsic value? For MFE-Mediaforeurope, we've compiled three further elements you should assess:
- Risks: Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with MFE-Mediaforeurope , and understanding these should be part of your investment process.
- Future Earnings: How does MFEB'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.
- 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 BIT 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
About BIT:MFEB
MFE-Mediaforeurope
Operates in the television industry in Italy and Spain.
Undervalued with adequate balance sheet and pays a dividend.