- Poland
- /
- Telecom Services and Carriers
- /
- WSE:OPL
Are Investors Undervaluing Orange Polska S.A. (WSE:OPL) By 38%?
Key Insights
- The projected fair value for Orange Polska is zł11.91 based on 2 Stage Free Cash Flow to Equity
- Orange Polska's zł7.41 share price signals that it might be 38% undervalued
- Analyst price target for OPL is zł7.56 which is 37% below our fair value estimate
In this article we are going to estimate the intrinsic value of Orange Polska S.A. (WSE:OPL) by projecting its future cash flows and then discounting them to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. 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.
View our latest analysis for Orange Polska
What's The Estimated Valuation?
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. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or 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.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) forecast
2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | |
Levered FCF (PLN, Millions) | zł684.5m | zł1.24b | zł1.33b | zł1.36b | zł1.23b | zł1.16b | zł1.13b | zł1.11b | zł1.11b | zł1.13b |
Growth Rate Estimate Source | Analyst x3 | Analyst x2 | Analyst x3 | Analyst x2 | Analyst x2 | Est @ -5.59% | Est @ -3.00% | Est @ -1.19% | Est @ 0.08% | Est @ 0.97% |
Present Value (PLN, Millions) Discounted @ 9.0% | zł628 | zł1.0k | zł1.0k | zł966 | zł801 | zł694 | zł618 | zł560 | zł515 | zł477 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = zł7.3b
We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 3.0%. We discount the terminal cash flows to today's value at a cost of equity of 9.0%.
Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = zł1.1b× (1 + 3.0%) ÷ (9.0%– 3.0%) = zł20b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= zł20b÷ ( 1 + 9.0%)10= zł8.3b
The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is zł16b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of zł7.4, the company appears quite undervalued at a 38% 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 Orange Polska 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 9.0%, which is based on a levered beta of 0.800. 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 Orange Polska
- Debt is not viewed as a risk.
- Earnings declined over the past year.
- Dividend is low compared to the top 25% of dividend payers in the Telecom market.
- Annual earnings are forecast to grow faster than the Polish market.
- Trading below our estimate of fair value by more than 20%.
- Dividends are not covered by cash flow.
- Annual revenue is forecast to grow slower than the Polish market.
Looking Ahead:
Whilst important, the DCF calculation 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. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. 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. Why is the intrinsic value higher than the current share price? For Orange Polska, there are three essential items you should further examine:
- Risks: To that end, you should be aware of the 2 warning signs we've spotted with Orange Polska .
- Future Earnings: How does OPL'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.
- 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!
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.
New: AI Stock Screener & Alerts
Our new AI Stock Screener scans the market every day to uncover opportunities.
• Dividend Powerhouses (3%+ Yield)
• Undervalued Small Caps with Insider Buying
• High growth Tech and AI Companies
Or build your own from over 50 metrics.
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.
About WSE:OPL
Orange Polska
Provides telecommunications services for individuals, businesses, and wholesale customers in Poland.
Undervalued with adequate balance sheet.