Calculating The Intrinsic Value Of Public Joint-Stock Company Unipro (MCX:UPRO)

By
Simply Wall St
Published
June 21, 2021
MISX:UPRO
Source: Shutterstock

Today we will run through one way of estimating the intrinsic value of Public Joint-Stock Company Unipro (MCX:UPRO) by estimating the company's future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

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.

Check out our latest analysis for Unipro

The model

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 discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) estimate

2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Levered FCF (RUB, Millions) ₽17.7b ₽23.0b ₽24.8b ₽21.8b ₽17.9b ₽17.2b ₽17.2b ₽17.5b ₽18.1b ₽19.0b
Growth Rate Estimate Source Analyst x1 Analyst x4 Analyst x4 Analyst x4 Analyst x3 Est @ -3.67% Est @ -0.33% Est @ 2% Est @ 3.63% Est @ 4.77%
Present Value (RUB, Millions) Discounted @ 13% ₽15.7k ₽18.1k ₽17.2k ₽13.4k ₽9.7k ₽8.3k ₽7.3k ₽6.6k ₽6.1k ₽5.6k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₽108b

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 (7.4%) 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 13%.

Terminal Value (TV)= FCF2030 × (1 + g) ÷ (r – g) = ₽19b× (1 + 7.4%) ÷ (13%– 7.4%) = ₽373b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= ₽373b÷ ( 1 + 13%)10= ₽111b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₽219b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of ₽2.8, the company appears about fair value at a 19% discount to where the stock price trades currently. 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.

dcf
MISX:UPRO Discounted Cash Flow June 22nd 2021

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. 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 Unipro 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 13%, 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.

Next Steps:

Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Unipro, we've compiled three relevant elements you should further research:

  1. Risks: As an example, we've found 1 warning sign for Unipro that you need to consider before investing here.
  2. Future Earnings: How does UPRO'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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the MISX every day. If you want to find the calculation for other stocks just search here.

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