A Look At The Fair Value Of Sitios Latinoamérica, S.A.B. de C.V. (BMV:LASITEB-1)

Key Insights

• Sitios Latinoamérica. de's estimated fair value is Mex$7.47 based on 2 Stage Free Cash Flow to Equity
• Sitios Latinoamérica. de's Mex$7.00 share price indicates it is trading at similar levels as its fair value estimate
• Peers of Sitios Latinoamérica. de are currently trading on average at a 67% premium

In this article we are going to estimate the intrinsic value of Sitios Latinoamérica, S.A.B. de C.V. (BMV:LASITEB-1) by projecting its future cash flows and then discounting them to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

View our latest analysis for Sitios Latinoamérica. de

What's The Estimated Valuation?

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. In the first stage we need to estimate the cash flows to the business over the next ten years. 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, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) forecast

	2023	2024	2025	2026	2027	2028	2029	2030	2031	2032
Levered FCF (MX$, Millions)	Mex$1.76b	Mex$1.89b	Mex$2.03b	Mex$2.18b	Mex$2.35b	Mex$2.52b	Mex$2.71b	Mex$2.92b	Mex$3.14b	Mex$3.37b
Growth Rate Estimate Source	Analyst x1	Est @ 7.39%	Est @ 7.44%	Est @ 7.47%	Est @ 7.49%	Est @ 7.51%	Est @ 7.52%	Est @ 7.53%	Est @ 7.54%	Est @ 7.54%
Present Value (MX$, Millions) Discounted @ 15%	Mex$1.5k	Mex$1.4k	Mex$1.3k	Mex$1.3k	Mex$1.2k	Mex$1.1k	Mex$1.0k	Mex$958	Mex$896	Mex$839

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = Mex$12b

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 7.6%. We discount the terminal cash flows to today's value at a cost of equity of 15%.

Terminal Value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = Mex$3.4b× (1 + 7.6%) ÷ (15%– 7.6%) = Mex$49b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= Mex$49b÷ ( 1 + 15%)¹⁰= Mex$12b

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$24b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of Mex$7.0, the company appears about fair value at a 6.3% discount to where the stock price trades currently. 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.

The Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual 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 Sitios Latinoamérica. 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 15%, 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.

Looking Ahead:

Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. It's not possible to obtain a foolproof valuation with a DCF model. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Sitios Latinoamérica. de, we've compiled three pertinent items you should assess:

1. Risks: As an example, we've found 1 warning sign for Sitios Latinoamérica. de that you need to consider before investing here.
2. Future Earnings: How does LASITE B-1'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 BMV 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.