Is There An Opportunity With Promotora y Operadora de Infraestructura, S. A. B. de C. V.'s (BMV:PINFRA) 37% Undervaluation?

Today we will run through one way of estimating the intrinsic value of Promotora y Operadora de Infraestructura, S. A. B. de C. V. (BMV:PINFRA) 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. 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. 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 Promotora y Operadora de Infraestructura 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. 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 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$3.59b	Mex$5.02b	Mex$5.44b	Mex$5.83b	Mex$6.26b	Mex$6.71b	Mex$7.19b	Mex$7.71b	Mex$8.26b	Mex$8.85b
Growth Rate Estimate Source	Analyst x2	Analyst x2	Analyst x1	Est @ 7.3%	Est @ 7.25%	Est @ 7.22%	Est @ 7.19%	Est @ 7.17%	Est @ 7.16%	Est @ 7.15%
Present Value (MX$, Millions) Discounted @ 12%	Mex$3.2k	Mex$4.0k	Mex$3.8k	Mex$3.7k	Mex$3.5k	Mex$3.4k	Mex$3.2k	Mex$3.1k	Mex$2.9k	Mex$2.8k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = Mex$34b

The second stage is also known as Terminal Value, this is the business's cash flow after 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 (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 12%.

Terminal Value (TV)= FCF₂₀₃₁ × (1 + g) ÷ (r – g) = Mex$8.8b× (1 + 7.1%) ÷ (12%– 7.1%) = Mex$187b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= Mex$187b÷ ( 1 + 12%)¹⁰= Mex$59b

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$93b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of Mex$144, the company appears quite good value at a 37% discount to where the stock price trades currently. 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. If you don't agree with these result, have a go at the calculation yourself and play with the 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 Promotora y Operadora de Infraestructura 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 12%, which is based on a levered beta of 0.870. 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 ideally won't be the sole piece of analysis you scrutinize for a company. DCF models are not the be-all and end-all of investment valuation. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. What is the reason for the share price sitting below the intrinsic value? For Promotora y Operadora de Infraestructura S. A. B. de C. V, there are three further items you should consider:

1. Risks: Case in point, we've spotted 1 warning sign for Promotora y Operadora de Infraestructura S. A. B. de C. V you should be aware of.
2. Future Earnings: How does PINFRA *'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.