Stock Analysis

A Look At The Fair Value Of Public Joint Stock Company Gazprom (MCX:GAZP)

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MISX:GAZP
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How far off is Public Joint Stock Company Gazprom (MCX:GAZP) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the forecast future cash flows of the company and discounting them back to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. 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. 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 Gazprom

What's the estimated valuation?

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. 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) estimate

2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Levered FCF (RUB, Millions) ₽729.8b ₽763.8b ₽863.0b ₽1.00t ₽1.10t ₽1.21t ₽1.31t ₽1.42t ₽1.53t ₽1.65t
Growth Rate Estimate Source Analyst x8 Analyst x7 Analyst x4 Analyst x3 Est @ 9.91% Est @ 9.17% Est @ 8.65% Est @ 8.29% Est @ 8.03% Est @ 7.86%
Present Value (RUB, Millions) Discounted @ 20% ₽610.2k ₽533.9k ₽504.4k ₽490.8k ₽451.1k ₽411.7k ₽374.0k ₽338.7k ₽305.9k ₽275.9k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₽4.3t

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 7.4%. We discount the terminal cash flows to today's value at a cost of equity of 20%.

Terminal Value (TV)= FCF2031 × (1 + g) ÷ (r – g) = ₽1.7t× (1 + 7.4%) ÷ (20%– 7.4%) = ₽15t

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= ₽15t÷ ( 1 + 20%)10= ₽2.4t

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 ₽6.7t. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of ₽280, the company appears about fair value at a 1.7% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

dcf
MISX:GAZP Discounted Cash Flow July 16th 2021

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 Gazprom 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 20%, which is based on a levered beta of 1.775. 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.

Looking Ahead:

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. DCF models are not the be-all and end-all of investment valuation. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Gazprom, we've compiled three further aspects you should consider:

  1. Risks: Case in point, we've spotted 1 warning sign for Gazprom you should be aware of.
  2. Future Earnings: How does GAZP'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: 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. Simply Wall St updates its DCF calculation for every Russian stock every day, so if you want to find the intrinsic value of any other stock just search here.

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