A Look At The Fair Value Of Ulisse Biomed S.p.A. (BIT:UBM)

Key Insights

• Ulisse Biomed's estimated fair value is €1.52 based on 2 Stage Free Cash Flow to Equity
• Ulisse Biomed's €1.63 share price indicates it is trading at similar levels as its fair value estimate
• When compared to theindustry average discount of -190%, Ulisse Biomed's competitors seem to be trading at a greater premium to fair value

Today we will run through one way of estimating the intrinsic value of Ulisse Biomed S.p.A. (BIT:UBM) by taking the forecast future cash flows of the company and discounting them back to today's value. This will be done using the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

See our latest analysis for Ulisse Biomed

The Calculation

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.

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) estimate

	2023	2024	2025	2026	2027	2028	2029	2030	2031	2032
Levered FCF (€, Millions)	-€289.3k	€233.5k	€456.8k	€650.1k	€846.6k	€1.03m	€1.19m	€1.33m	€1.45m	€1.55m
Growth Rate Estimate Source	Analyst x1	Analyst x1	Analyst x1	Est @ 42.31%	Est @ 30.24%	Est @ 21.79%	Est @ 15.87%	Est @ 11.73%	Est @ 8.83%	Est @ 6.80%
Present Value (€, Millions) Discounted @ 9.9%	-€0.3	€0.2	€0.3	€0.4	€0.5	€0.6	€0.6	€0.6	€0.6	€0.6

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = €4.3m

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. 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 2.1%. We discount the terminal cash flows to today's value at a cost of equity of 9.9%.

Terminal Value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = €1.6m× (1 + 2.1%) ÷ (9.9%– 2.1%) = €20m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= €20m÷ ( 1 + 9.9%)¹⁰= €7.9m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is €12m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of €1.6, the company appears around fair value at the time of writing. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

Important 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 Ulisse Biomed 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 9.9%, 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 Ulisse Biomed

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. 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. For Ulisse Biomed, we've put together three essential items you should look at:

1. Risks: We feel that you should assess the 3 warning signs for Ulisse Biomed (1 is potentially serious!) we've flagged before making an investment in the company.
2. Future Earnings: How does UBM'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 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.