Estimating The Fair Value Of Public Joint-Stock Company "Second Generating Company of the Electric Power Wholesale Market" (MCX:OGKB)

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Public Joint-Stock Company "Second Generating Company of the Electric Power Wholesale Market" (MCX:OGKB) as an investment opportunity 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. 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.

View our latest analysis for Second Generating Company of the Electric Power Wholesale Market

The method

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 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.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) estimate

	2021	2022	2023	2024	2025	2026	2027	2028	2029	2030
Levered FCF (RUB, Millions)	₽13.6b	₽23.7b	₽22.3b	₽22.9b	₽5.89b	₽4.86b	₽4.37b	₽4.17b	₽4.13b	₽4.20b
Growth Rate Estimate Source	Analyst x1	Analyst x3	Analyst x3	Analyst x3	Analyst x3	Est @ -17.52%	Est @ -9.96%	Est @ -4.66%	Est @ -0.96%	Est @ 1.64%
Present Value (RUB, Millions) Discounted @ 14%	₽11.9k	₽18.1k	₽14.9k	₽13.3k	₽3.0k	₽2.2k	₽1.7k	₽1.4k	₽1.2k	₽1.1k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₽69b

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. 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 (7.7%) 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)= FCF₂₀₃₀ × (1 + g) ÷ (r – g) = ₽4.2b× (1 + 7.7%) ÷ (14%– 7.7%) = ₽67b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ₽67b÷ ( 1 + 14%)¹⁰= ₽17b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₽86b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of ₽0.8, 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.

Important assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 Second Generating Company of the Electric Power Wholesale Market 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 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.

Moving On:

Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Second Generating Company of the Electric Power Wholesale Market, there are three further factors you should look at:

1. Risks: As an example, we've found 2 warning signs for Second Generating Company of the Electric Power Wholesale Market (1 is significant!) that you need to consider before investing here.
2. Future Earnings: How does OGKB'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 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!

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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This article by Simply Wall St is general in nature. 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.
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