Estimating The Fair Value Of Fabryka Obrabiarek RAFAMET S.A. (WSE:RAF)

Key Insights

• Fabryka Obrabiarek RAFAMET's estimated fair value is zł90.51 based on 2 Stage Free Cash Flow to Equity
• With zł77.00 share price, Fabryka Obrabiarek RAFAMET appears to be trading close to its estimated fair value
• The average premium for Fabryka Obrabiarek RAFAMET's competitorsis currently 33%

In this article we are going to estimate the intrinsic value of Fabryka Obrabiarek RAFAMET S.A. (WSE:RAF) by estimating the company's future cash flows and discounting them to their present value. Our analysis will employ the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

We've discovered 2 warning signs about Fabryka Obrabiarek RAFAMET. View them for free.

Step By Step Through The Calculation

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. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last 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) forecast

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (PLN, Millions)	zł7.54m	zł12.0m	zł17.2m	zł22.6m	zł27.9m	zł32.8m	zł37.2m	zł41.2m	zł44.8m	zł48.2m
Growth Rate Estimate Source	Est @ 83.32%	Est @ 59.60%	Est @ 42.99%	Est @ 31.37%	Est @ 23.23%	Est @ 17.54%	Est @ 13.55%	Est @ 10.76%	Est @ 8.81%	Est @ 7.44%
Present Value (PLN, Millions) Discounted @ 10%	zł6.9	zł9.9	zł12.9	zł15.4	zł17.3	zł18.4	zł19.0	zł19.1	zł18.9	zł18.5

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = zł156m

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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 4.3%. We discount the terminal cash flows to today's value at a cost of equity of 10%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = zł48m× (1 + 4.3%) ÷ (10%– 4.3%) = zł864m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= zł864m÷ ( 1 + 10%)¹⁰= zł331m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is zł487m. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of zł77.0, the company appears about fair value at a 15% 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 Fabryka Obrabiarek RAFAMET 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 10%, which is based on a levered beta of 1.065. 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.

See our latest analysis for Fabryka Obrabiarek RAFAMET

Moving On:

Whilst important, the DCF calculation 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. For Fabryka Obrabiarek RAFAMET, we've compiled three fundamental factors you should further research:

1. Risks: Every company has them, and we've spotted 2 warning signs for Fabryka Obrabiarek RAFAMET you should know about.
2. 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!
3. Other Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the WSE every day. If you want to find the calculation for other stocks just search here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.