An Intrinsic Calculation For Impresa – Sociedade Gestora de Participações Sociais SA (ELI:IPR) Shows It’s 47.04% Undervalued

Does the share price for Impresa – Sociedade Gestora de Participações Sociais SA (ELI:IPR) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value by projecting its future cash flows and then discounting them to today’s value. I will be using the discounted cash flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model. If you are reading this and its not October 2018 then I highly recommend you check out the latest calculation for Impresa – Sociedade Gestora de Participações Sociais by following the link below.

See our latest analysis for Impresa – Sociedade Gestora de Participações Sociais

The model

I use what is known as a 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the first stage is higher growth, and the second stage is a more stable growth phase. 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

2019 2020 2021 2022 2023
Levered FCF (€, Millions) €15.00 €14.00 €14.00 €13.40 €12.82
Source Analyst x1 Analyst x1 Analyst x1 Est @ -4.32% Est @ -4.32%
Present Value Discounted @ 18.49% €12.66 €9.97 €8.42 €6.80 €5.49

Present Value of 5-year Cash Flow (PVCF)= €43.3m

After calculating the present value of future cash flows in the intial 5-year period we need to calculate the Terminal Value, which accounts for all the future cash flows beyond the first stage. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 1.5%. We discount this to today’s value at a cost of equity of 18.5%.

Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = €12.8m × (1 + 1.5%) ÷ (18.5% – 1.5%) = €76.6m

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = €76.6m ÷ ( 1 + 18.5%)5 = €32.8m

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 €76.1m. In the final step we 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) or ADR then we use the equivalent number. This results in an intrinsic value of €0.45. Relative to the current share price of €0.24, the stock is quite undervalued at a 47.0% discount to what it is available for right now.

ENXTLS:IPR Intrinsic Value Export October 1st 18
ENXTLS:IPR Intrinsic Value Export October 1st 18

Important assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Impresa – Sociedade Gestora de Participações Sociais 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 18.5%, which is based on a levered beta of 2. 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:

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. What is the reason for the share price to differ from the intrinsic value? For IPR, there are three fundamental factors you should further research:

  1. Financial Health: Does IPR 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 IPR’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 IPR? 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 for every stock on the ELI every 6 hours. If you want to find the calculation for other stocks just search here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.