Investors Are Undervaluing Mabion SA. (WSE:MAB) By 40%

How far off is Mabion SA. (WSE:MAB) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to today’s value. I will use the Discounted Cash Flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. If you are reading this and its not March 2018 then I highly recommend you check out the latest calculation for Mabion by following the link below. Check out our latest analysis for Mabion

The method

I’m 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 perpetual stable growth rate. To begin with we have to get estimates of the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount this to its value today and sum up the total to get the present value of these cash flows.

5-year cash flow forecast

2018 2019 2020 2021 2022
Levered FCF (PLN, Millions) PLN115.15 PLN92.45 PLN129.20 PLN222.65 PLN161.15
Source Analyst x2 Analyst x2 Analyst x2 Analyst x2 Analyst x2
Present Value Discounted @ 8.35% PLN106.28 PLN78.75 PLN101.58 PLN161.56 PLN107.93

Present Value of 5-year Cash Flow (PVCF)= PLN556

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 the GDP. In this case I have used the 10-year government bond rate (1.7%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 8.3%.

Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = PLN161 × (1 + 1.7%) ÷ (8.3% – 1.7%) = PLN2,481

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = PLN2,481 / ( 1 + 8.3%)5 = PLN1,662

The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is PLN2,218. The last step is to then divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) then we use the equivalent number. This results in an intrinsic value of PLN187.95, which, compared to the current share price of PLN112, we find that Mabion is quite undervalued at a 40.41% discount to what it is available for right now.

WSE:MAB Intrinsic Value Mar 15th 18
WSE:MAB Intrinsic Value Mar 15th 18

Important assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. You don’t have to agree with my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Mabion as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 8.3%, which is based on a levered beta of 0.8. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Next Steps:

Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For MAB, there are three essential aspects you should further research:

  1. Financial Health: Does MAB have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
  2. Future Earnings: How does MAB’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 High Quality Alternatives: Are there other high quality stocks you could be holding instead of MAB? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St does a DCF calculation for every PL stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.