A Look At The Fair Value Of VOOLT Spólka Akcyjna (WSE:VLT)

Key Insights

• The projected fair value for VOOLT Spólka Akcyjna is zł2.96 based on 2 Stage Free Cash Flow to Equity
• With zł2.42 share price, VOOLT Spólka Akcyjna appears to be trading close to its estimated fair value
• The average premium for VOOLT Spólka Akcyjna's competitorsis currently 539%

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of VOOLT Spólka Akcyjna (WSE:VLT) as an investment opportunity by taking the expected future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model on this occasion. It may sound complicated, but actually it is quite simple!

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

View our latest analysis for VOOLT Spólka Akcyjna

What's The Estimated Valuation?

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To start off with, we need to estimate the next ten years of cash flows. 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, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) forecast

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (PLN, Millions)	zł692.8k	zł956.5k	zł1.22m	zł1.47m	zł1.70m	zł1.90m	zł2.08m	zł2.24m	zł2.38m	zł2.51m
Growth Rate Estimate Source	Est @ 52.84%	Est @ 38.06%	Est @ 27.72%	Est @ 20.48%	Est @ 15.41%	Est @ 11.87%	Est @ 9.38%	Est @ 7.65%	Est @ 6.43%	Est @ 5.58%
Present Value (PLN, Millions) Discounted @ 10%	zł0.6	zł0.8	zł0.9	zł1.0	zł1.1	zł1.1	zł1.1	zł1.0	zł1.0	zł1.0

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = zł9.5m

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 (3.6%) 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 10%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = zł2.5m× (1 + 3.6%) ÷ (10%– 3.6%) = zł40m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= zł40m÷ ( 1 + 10%)¹⁰= zł15m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is zł25m. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of zł2.4, the company appears about fair value at a 18% 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.

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. 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 VOOLT 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 1.108. 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:

Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. It's not possible to obtain a foolproof valuation with a DCF model. 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 VOOLT Spólka Akcyjna, we've compiled three further aspects you should explore:

1. Risks: As an example, we've found 4 warning signs for VOOLT Spólka Akcyjna (3 are a bit unpleasant!) that you need to consider before investing here.
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 Top Analyst Picks: Interested to see what the analysts are thinking? Take a look at our interactive list of analysts' top stock picks to find out what they feel might have an attractive future outlook!

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.