Stock Analysis

# A Look At The Intrinsic Value Of IMS S.A. (WSE:IMS)

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### Key Insights

• IMS' estimated fair value is zł2.22 based on Dividend Discount Model
• With zł2.50 share price, IMS appears to be trading close to its estimated fair value
• IMS' peers are currently trading at a discount of 51% on average

In this article we are going to estimate the intrinsic value of IMS S.A. (WSE:IMS) 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. It may sound complicated, but actually it is quite simple!

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

See our latest analysis for IMS

## Step By Step Through The Calculation

We have to calculate the value of IMS slightly differently to other stocks because it is a media company. Instead of using free cash flows, which are hard to estimate and often not reported by analysts in this industry, dividends per share (DPS) payments are used. This often underestimates the value of a stock, but it can still be good as a comparison to competitors. We use the Gordon Growth Model, which assumes dividend will grow into perpetuity at a rate that can be sustained. For a number of reasons a very conservative growth rate is used that cannot exceed that of a company's Gross Domestic Product (GDP). In this case we used the 5-year average of the 10-year government bond yield (3.0%). The expected dividend per share is then discounted to today's value at a cost of equity of 11%. Compared to the current share price of zł2.5, 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.

Value Per Share = Expected Dividend Per Share / (Discount Rate - Perpetual Growth Rate)

= zł0.2 / (11% – 3.0%)

= zł2.2

## Important 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 IMS 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 11%, which is based on a levered beta of 1.095. 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 IMS

Strength
• Earnings growth over the past year exceeded the industry.
• Debt is not viewed as a risk.
Weakness
• Dividend is low compared to the top 25% of dividend payers in the Media market.
• Current share price is above our estimate of fair value.
• Shareholders have been diluted in the past year.
Opportunity
• IMS' financial characteristics indicate limited near-term opportunities for shareholders.
• Lack of analyst coverage makes it difficult to determine IMS' earnings prospects.
Threat
• Dividends are not covered by cash flow.

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. DCF models are not the be-all and end-all of investment valuation. 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. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For IMS, there are three fundamental elements you should further examine:

1. Risks: For example, we've discovered 4 warning signs for IMS (1 can't be ignored!) that you should be aware of 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.

### Valuation is complex, but we're helping make it simple.

Find out whether IMS is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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