Is There An Opportunity With Grupo Aeroportuario del Pacífico, S.A.B. de C.V.'s (BMV:GAPB) 45% Undervaluation?

By
Simply Wall St
Published
July 21, 2021
BMV:GAP B
Source: Shutterstock

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Grupo Aeroportuario del Pacífico, S.A.B. de C.V. (BMV:GAPB) as an investment opportunity by taking the forecast future cash flows of the company and discounting them back to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

Check out our latest analysis for Grupo Aeroportuario del Pacífico. de

Crunching the numbers

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.

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

2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Levered FCF (MX$, Millions) Mex$4.17b Mex$7.77b Mex$10.9b Mex$14.3b Mex$17.7b Mex$21.0b Mex$24.2b Mex$27.2b Mex$30.2b Mex$33.2b
Growth Rate Estimate Source Analyst x2 Analyst x1 Est @ 40.93% Est @ 30.75% Est @ 23.63% Est @ 18.65% Est @ 15.16% Est @ 12.72% Est @ 11.01% Est @ 9.81%
Present Value (MX$, Millions) Discounted @ 15% Mex$3.6k Mex$5.9k Mex$7.3k Mex$8.3k Mex$9.0k Mex$9.3k Mex$9.4k Mex$9.2k Mex$8.9k Mex$8.6k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = Mex$80b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 7.0%. We discount the terminal cash flows to today's value at a cost of equity of 15%.

Terminal Value (TV)= FCF2031 × (1 + g) ÷ (r – g) = Mex$33b× (1 + 7.0%) ÷ (15%– 7.0%) = Mex$475b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= Mex$475b÷ ( 1 + 15%)10= Mex$123b

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$202b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of Mex$213, the company appears quite undervalued at a 45% 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:GAP B Discounted Cash Flow July 21st 2021

Important 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 Grupo Aeroportuario del Pacífico. 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 1.193. 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.

Moving On:

Valuation is only one side of the coin in terms of building your investment thesis, and it 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. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. Can we work out why the company is trading at a discount to intrinsic value? For Grupo Aeroportuario del Pacífico. de, we've compiled three relevant items you should look at:

  1. Risks: You should be aware of the 3 warning signs for Grupo Aeroportuario del Pacífico. de (1 can't be ignored!) we've uncovered before considering an investment in the company.
  2. Future Earnings: How does GAP 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. 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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