Hoteles City Express, S.A.B. de C.V.'s (BMV:HCITY) Intrinsic Value Is Potentially 95% Above Its Share Price

By
Simply Wall St
Published
January 22, 2022
BMV:HCITY *
Source: Shutterstock

In this article we are going to estimate the intrinsic value of Hoteles City Express, S.A.B. de C.V. (BMV:HCITY) 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. Believe it or not, it's not too difficult to follow, as you'll see from our example!

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

View our latest analysis for Hoteles City Express. de

Is Hoteles City Express. de fairly valued?

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, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Levered FCF (MX$, Millions) Mex$534.0m Mex$501.0m Mex$491.1m Mex$494.7m Mex$507.9m Mex$528.1m Mex$554.1m Mex$585.0m Mex$620.3m Mex$659.7m
Growth Rate Estimate Source Analyst x1 Analyst x1 Est @ -1.98% Est @ 0.74% Est @ 2.65% Est @ 3.99% Est @ 4.92% Est @ 5.57% Est @ 6.03% Est @ 6.35%
Present Value (MX$, Millions) Discounted @ 19% Mex$450 Mex$357 Mex$295 Mex$251 Mex$217 Mex$190 Mex$168 Mex$150 Mex$134 Mex$120

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = Mex$2.3b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 (7.1%) 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)= FCF2031 × (1 + g) ÷ (r – g) = Mex$660m× (1 + 7.1%) ÷ (19%– 7.1%) = Mex$6.2b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= Mex$6.2b÷ ( 1 + 19%)10= Mex$1.1b

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 Mex$3.5b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of Mex$4.3, the company appears quite undervalued at a 49% 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.

dcf
BMV:HCITY * Discounted Cash Flow January 22nd 2022

The assumptions

Now 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 Hoteles City Express. de 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.

Next Steps:

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. The DCF model is not a perfect stock valuation tool. 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. Why is the intrinsic value higher than the current share price? For Hoteles City Express. de, we've put together three relevant items you should assess:

  1. Risks: For example, we've discovered 3 warning signs for Hoteles City Express. de that you should be aware of before investing here.
  2. Future Earnings: How does HCITY *'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 Mexican stock every day, so if you want to find the intrinsic value of any other stock just search here.

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