A Look At The Intrinsic Value Of SZAR Spólka Akcyjna (WSE:SZR)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, SZAR Spólka Akcyjna fair value estimate is zł0.084
• Current share price of zł0.099 suggests SZAR Spólka Akcyjna is potentially trading close to its fair value
• SZAR Spólka Akcyjna's peers are currently trading at a discount of 46% on average

Does the December share price for SZAR Spólka Akcyjna (WSE:SZR) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by projecting its future cash flows and then discounting them to today's 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.

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

See our latest analysis for SZAR Spólka Akcyjna

The Method

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 discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (PLN, Millions)	zł1.12m	zł914.5k	zł805.4k	zł746.5k	zł716.0k	zł703.0k	zł701.4k	zł707.6k	zł719.3k	zł735.2k
Growth Rate Estimate Source	Est @ -27.97%	Est @ -18.54%	Est @ -11.93%	Est @ -7.31%	Est @ -4.08%	Est @ -1.81%	Est @ -0.23%	Est @ 0.88%	Est @ 1.66%	Est @ 2.20%
Present Value (PLN, Millions) Discounted @ 10%	zł1.0	zł0.8	zł0.6	zł0.5	zł0.4	zł0.4	zł0.4	zł0.3	zł0.3	zł0.3

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = zł5.0m

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 3.5%. We discount the terminal cash flows to today's value at a cost of equity of 10%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = zł735k× (1 + 3.5%) ÷ (10%– 3.5%) = zł11m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= zł11m÷ ( 1 + 10%)¹⁰= zł4.2m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is zł9.2m. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of zł0.1, the company appears around fair value 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

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual 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 SZAR Spólka Akcyjna 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 1.080. 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.

SWOT Analysis for SZAR Spólka Akcyjna

Looking Ahead:

Whilst important, the DCF calculation 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. For SZAR Spólka Akcyjna, there are three relevant items you should further examine:

1. Risks: Every company has them, and we've spotted 3 warning signs for SZAR Spólka Akcyjna you should know about.
2. 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!
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. Simply Wall St updates its DCF calculation for every Polish 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.