Estimating The Intrinsic Value Of S.C. Promateris S.A. (BVB:PPL)

Key Insights

• The projected fair value for S.C. Promateris is RON5.75 based on 2 Stage Free Cash Flow to Equity
• S.C. Promateris' RON6.45 share price indicates it is trading at similar levels as its fair value estimate
• Industry average of 5,987% suggests S.C. Promateris' peers are currently trading at a higher premium to fair value

In this article we are going to estimate the intrinsic value of S.C. Promateris S.A. (BVB:PPL) by taking the expected future cash flows and discounting them to their present value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Believe it or not, it's not too difficult to follow, as you'll see from our example!

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

Our free stock report includes 4 warning signs investors should be aware of before investing in S.C. Promateris. Read for free now.

The Calculation

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. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last 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

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (RON, Millions)	RON12.6m	RON13.7m	RON14.8m	RON16.0m	RON17.1m	RON18.3m	RON19.6m	RON20.9m	RON22.2m	RON23.7m
Growth Rate Estimate Source	Est @ 10.27%	Est @ 9.08%	Est @ 8.25%	Est @ 7.67%	Est @ 7.26%	Est @ 6.97%	Est @ 6.78%	Est @ 6.64%	Est @ 6.54%	Est @ 6.47%
Present Value (RON, Millions) Discounted @ 14%	RON11.0	RON10.5	RON9.9	RON9.3	RON8.7	RON8.2	RON7.6	RON7.1	RON6.6	RON6.1

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = RON85m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (6.3%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 14%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = RON24m× (1 + 6.3%) ÷ (14%– 6.3%) = RON309m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= RON309m÷ ( 1 + 14%)¹⁰= RON80m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is RON165m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of RON6.5, the company appears around fair value at the time of writing. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

The 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 S.C. Promateris 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 14%, which is based on a levered beta of 1.120. 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.

See our latest analysis for S.C. Promateris

Next Steps:

Although the valuation of a company is important, 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?" 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. For S.C. Promateris, there are three pertinent factors you should consider:

1. Risks: To that end, you should learn about the 4 warning signs we've spotted with S.C. Promateris (including 2 which are a bit concerning) .
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 BVB every day. If you want to find the calculation for other stocks just search here.

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.