- Italy
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- Telecom Services and Carriers
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- BIT:INW
Estimating The Fair Value Of Infrastrutture Wireless Italiane S.p.A. (BIT:INW)
Key Insights
- The projected fair value for Infrastrutture Wireless Italiane is €9.66 based on 2 Stage Free Cash Flow to Equity
- Infrastrutture Wireless Italiane's €11.35 share price indicates it is trading at similar levels as its fair value estimate
- Analyst price target for INW is €13.38, which is 38% above our fair value estimate
Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Infrastrutture Wireless Italiane S.p.A. (BIT:INW) as an investment opportunity by taking the forecast future cash flows of the company and discounting them back to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. There's really not all that much to it, even though it might appear quite complex.
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.
View our latest analysis for Infrastrutture Wireless Italiane
The Calculation
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 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 discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) estimate
2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | |
Levered FCF (€, Millions) | €539.4m | €601.6m | €640.6m | €659.2m | €675.7m | €691.8m | €707.9m | €723.9m | €740.1m | €756.4m |
Growth Rate Estimate Source | Analyst x9 | Analyst x9 | Analyst x7 | Analyst x5 | Est @ 2.50% | Est @ 2.39% | Est @ 2.32% | Est @ 2.27% | Est @ 2.23% | Est @ 2.21% |
Present Value (€, Millions) Discounted @ 8.8% | €496 | €508 | €497 | €470 | €443 | €417 | €392 | €368 | €346 | €325 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = €4.3b
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 8.8%.
Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = €756m× (1 + 2.2%) ÷ (8.8%– 2.2%) = €12b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= €12b÷ ( 1 + 8.8%)10= €5.0b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is €9.2b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of €11.3, the company appears around fair value at the time of writing. 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. 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 Infrastrutture Wireless Italiane 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 8.8%, 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 Infrastrutture Wireless Italiane
- Earnings growth over the past year exceeded the industry.
- Debt is well covered by earnings and cashflows.
- Dividend is low compared to the top 25% of dividend payers in the Telecom market.
- Expensive based on P/E ratio and estimated fair value.
- Annual earnings are forecast to grow faster than the Italian market.
- Dividends are not covered by earnings and cashflows.
- Revenue is forecast to grow slower than 20% per year.
Moving On:
Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. 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. For Infrastrutture Wireless Italiane, we've put together three important items you should explore:
- Risks: To that end, you should learn about the 2 warning signs we've spotted with Infrastrutture Wireless Italiane (including 1 which makes us a bit uncomfortable) .
- Future Earnings: How does INW'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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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.
About BIT:INW
Infrastrutture Wireless Italiane
Operates in the electronic communications infrastructure sector in Italy.
Proven track record with moderate growth potential.