Ozon Holdings PLC's (NASDAQ:OZON) Intrinsic Value Is Potentially 98% Above Its Share Price

By
Simply Wall St
Published
November 18, 2021
NasdaqGS:OZON
Source: Shutterstock

Today we will run through one way of estimating the intrinsic value of Ozon Holdings PLC (NASDAQ:OZON) by estimating the company's future cash flows and discounting them to their present value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

View our latest analysis for Ozon Holdings

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 start off with, we need to estimate 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, 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

2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Levered FCF (RUB, Millions) -₽32.4b -₽15.5b ₽14.8b ₽40.5b ₽64.9b ₽92.7b ₽121.1b ₽147.7b ₽171.3b ₽191.5b
Growth Rate Estimate Source Analyst x5 Analyst x5 Analyst x2 Analyst x3 Est @ 60.37% Est @ 42.85% Est @ 30.58% Est @ 22% Est @ 15.98% Est @ 11.78%
Present Value (RUB, Millions) Discounted @ 9.5% -₽29.6k -₽13.0k ₽11.3k ₽28.2k ₽41.3k ₽53.9k ₽64.3k ₽71.6k ₽75.9k ₽77.5k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₽381b

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 (2.0%) 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 9.5%.

Terminal Value (TV)= FCF2031 × (1 + g) ÷ (r – g) = ₽192b× (1 + 2.0%) ÷ (9.5%– 2.0%) = ₽2.6t

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= ₽2.6t÷ ( 1 + 9.5%)10= ₽1.1t

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₽1.4t. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of US$47.7, the company appears quite good value at a 50% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf
NasdaqGS:OZON Discounted Cash Flow November 19th 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 Ozon 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 9.5%, which is based on a levered beta of 1.088. 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:

Although the valuation of a company is important, 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. 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. Why is the intrinsic value higher than the current share price? For Ozon Holdings, there are three relevant factors you should assess:

  1. Risks: Be aware that Ozon Holdings is showing 1 warning sign in our investment analysis , you should know about...
  2. Future Earnings: How does OZON'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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NASDAQGS every day. If you want to find the calculation for other stocks just search here.

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