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- NYSE:XPRO
An Intrinsic Calculation For Expro Group Holdings N.V. (NYSE:XPRO) Suggests It's 25% Undervalued
Key Insights
- Expro Group Holdings' estimated fair value is US$20.31 based on 2 Stage Free Cash Flow to Equity
- Current share price of US$15.21 suggests Expro Group Holdings is potentially 25% undervalued
- Our fair value estimate is 8.9% lower than Expro Group Holdings' analyst price target of US$22.29
In this article we are going to estimate the intrinsic value of Expro Group Holdings N.V. (NYSE:XPRO) by taking the expected future cash flows and discounting them to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
See our latest analysis for Expro Group Holdings
What's The Estimated Valuation?
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) forecast
2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | |
Levered FCF ($, Millions) | US$134.8m | US$174.7m | US$137.2m | US$163.3m | US$168.0m | US$172.5m | US$176.9m | US$181.2m | US$185.5m | US$189.8m |
Growth Rate Estimate Source | Analyst x3 | Analyst x3 | Analyst x1 | Analyst x1 | Est @ 2.87% | Est @ 2.68% | Est @ 2.54% | Est @ 2.44% | Est @ 2.38% | Est @ 2.33% |
Present Value ($, Millions) Discounted @ 9.1% | US$124 | US$147 | US$106 | US$115 | US$109 | US$103 | US$96.4 | US$90.6 | US$85.0 | US$79.8 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$1.1b
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 (2.2%) 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 9.1%.
Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$190m× (1 + 2.2%) ÷ (9.1%– 2.2%) = US$2.8b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$2.8b÷ ( 1 + 9.1%)10= US$1.2b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$2.2b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of US$15.2, the company appears a touch undervalued at a 25% 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.
Important Assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Expro Group Holdings 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 9.1%, which is based on a levered beta of 1.367. 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.
SWOT Analysis for Expro Group Holdings
- Debt is not viewed as a risk.
- No major weaknesses identified for XPRO.
- Annual earnings are forecast to grow faster than the American market.
- Trading below our estimate of fair value by more than 20%.
- Annual revenue is forecast to grow slower than the American market.
Moving On:
Whilst important, the DCF calculation 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. 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. What is the reason for the share price sitting below the intrinsic value? For Expro Group Holdings, we've put together three fundamental elements you should further research:
- Risks: To that end, you should be aware of the 2 warning signs we've spotted with Expro Group Holdings .
- Future Earnings: How does XPRO'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.
- 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 American stock every day, so if you want to find the intrinsic value of any other stock just search here.
Valuation is complex, but we're here to simplify it.
Discover if Expro Group Holdings might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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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.
About NYSE:XPRO
Expro Group Holdings
Engages in the provision of energy services in North and Latin America, Europe and Sub-Saharan Africa, the Middle East and North Africa, and the Asia-Pacific.
Flawless balance sheet with proven track record.