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Does This Valuation Of Altri, SGPS, S.A. (ELI:ALTR) Imply Investors Are Overpaying?
Does the January share price for Altri, SGPS, S.A. (ELI:ALTR) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the expected future cash flows and discounting them to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. Don't get put off by the jargon, the math behind it is actually quite straightforward.
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
View our latest analysis for Altri SGPS
What's The Estimated Valuation?
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To begin with, we have to get estimates of 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, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) forecast
2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | |
Levered FCF (€, Millions) | €120.1m | €105.7m | €124.0m | €125.8m | €127.5m | €129.1m | €130.6m | €132.1m | €133.5m | €134.9m |
Growth Rate Estimate Source | Analyst x4 | Analyst x4 | Analyst x1 | Est @ 1.46% | Est @ 1.33% | Est @ 1.24% | Est @ 1.17% | Est @ 1.13% | Est @ 1.09% | Est @ 1.07% |
Present Value (€, Millions) Discounted @ 17% | €102 | €76.6 | €76.6 | €66.2 | €57.1 | €49.2 | €42.4 | €36.5 | €31.5 | €27.1 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = €565m
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 1.0%. We discount the terminal cash flows to today's value at a cost of equity of 17%.
Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = €135m× (1 + 1.0%) ÷ (17%– 1.0%) = €831m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= €831m÷ ( 1 + 17%)10= €167m
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 €732m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of €4.7, the company appears potentially overvalued 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
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. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 Altri SGPS 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 17%, which is based on a levered beta of 1.892. 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 Altri SGPS
- Earnings growth over the past year exceeded its 5-year average.
- Debt is well covered by earnings and cashflows.
- Dividends are covered by earnings and cash flows.
- Earnings growth over the past year underperformed the Forestry industry.
- Dividend is low compared to the top 25% of dividend payers in the Forestry market.
- Expensive based on P/E ratio and estimated fair value.
- ALTR's financial characteristics indicate limited near-term opportunities for shareholders.
- Annual earnings are forecast to decline for the next 4 years.
Next Steps:
Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Why is the intrinsic value lower than the current share price? For Altri SGPS, we've compiled three essential factors you should consider:
- Risks: To that end, you should learn about the 3 warning signs we've spotted with Altri SGPS (including 1 which can't be ignored) .
- Future Earnings: How does ALTR'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 ENXTLS every day. If you want to find the calculation for other stocks just search here.
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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 ENXTLS:ALTR
Altri SGPS
Produces and sells cellulosic fibers and energy in Portugal and internationally.
Good value with adequate balance sheet.