Is Grupo Aeroportuario del Sureste, S. A. B. de C. V. (BMV:ASURB) Worth Mex$435 Based On Its Intrinsic Value?

Today we will run through one way of estimating the intrinsic value of Grupo Aeroportuario del Sureste, S. A. B. de C. V. (BMV:ASURB) by taking the expected future cash flows and discounting them to their present value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.

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.

Check out our latest analysis for Grupo Aeroportuario del Sureste S. A. B. de C. V

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 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 need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) estimate

	2022	2023	2024	2025	2026	2027	2028	2029	2030	2031
Levered FCF (MX$, Millions)	Mex$10.6b	Mex$10.7b	Mex$7.50b	Mex$7.61b	Mex$7.84b	Mex$8.18b	Mex$8.60b	Mex$9.10b	Mex$9.66b	Mex$10.3b
Growth Rate Estimate Source	Analyst x1	Analyst x3	Analyst x1	Est @ 1.37%	Est @ 3.1%	Est @ 4.31%	Est @ 5.15%	Est @ 5.75%	Est @ 6.16%	Est @ 6.45%
Present Value (MX$, Millions) Discounted @ 13%	Mex$9.4k	Mex$8.3k	Mex$5.2k	Mex$4.6k	Mex$4.2k	Mex$3.9k	Mex$3.6k	Mex$3.4k	Mex$3.1k	Mex$3.0k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = Mex$49b

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 7.1%. We discount the terminal cash flows to today's value at a cost of equity of 13%.

Terminal Value (TV)= FCF₂₀₃₁ × (1 + g) ÷ (r – g) = Mex$10b× (1 + 7.1%) ÷ (13%– 7.1%) = Mex$180b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= Mex$180b÷ ( 1 + 13%)¹⁰= Mex$52b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is Mex$100b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of Mex$435, the company appears reasonably expensive at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

The 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. 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 Grupo Aeroportuario del Sureste S. A. B. de C. V 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 13%, which is based on a levered beta of 1.053. 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:

Whilst important, the DCF calculation 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. Can we work out why the company is trading at a premium to intrinsic value? For Grupo Aeroportuario del Sureste S. A. B. de C. V, there are three additional items you should look at:

1. Risks: To that end, you should be aware of the 1 warning sign we've spotted with Grupo Aeroportuario del Sureste S. A. B. de C. V .
2. Future Earnings: How does ASUR B'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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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.