Key Insights
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The projected fair value for Ebusco Holding is €2.91 based on 2 Stage Free Cash Flow to Equity
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Current share price of €1.66 suggests Ebusco Holding is potentially 43% undervalued
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Our fair value estimate is 52% lower than Ebusco Holding’s analyst price target of €6.03
Today we’ll do a simple run through of a valuation method used to estimate the attractiveness of Ebusco Holding N.V. (AMS:EBUS) as an investment opportunity 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. Believe it or not, it’s not too difficult to follow, as you’ll see from our example!
We generally believe that a company’s value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. 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 Ebusco Holding
The Calculation
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
2024 |
2025 |
2026 |
2027 |
2028 |
2029 |
2030 |
2031 |
2032 |
2033 |
|
Levered FCF (€, Millions) |
-€21.1m |
-€23.3m |
€3.65m |
€5.88m |
€8.42m |
€11.0m |
€13.3m |
€15.4m |
€17.1m |
€18.5m |
Growth Rate Estimate Source |
Analyst x2 |
Analyst x2 |
Analyst x2 |
Est @ 61.17% |
Est @ 43.08% |
Est @ 30.42% |
Est @ 21.56% |
Est @ 15.36% |
Est @ 11.01% |
Est @ 7.97% |
Present Value (€, Millions) Discounted @ 6.4% |
-€19.9 |
-€20.6 |
€3.0 |
€4.6 |
€6.2 |
€7.6 |
€8.6 |
€9.3 |
€9.8 |
€9.9 |
(“Est” = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = €18m
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 (0.9%) 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 6.4%.
Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = €18m× (1 + 0.9%) ÷ (6.4%– 0.9%) = €335m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= €335m÷ ( 1 + 6.4%)10= €180m
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is €198m. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of €1.7, the company appears quite good value at a 43% 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.
Important Assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Ebusco Holding 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 6.4%, which is based on a levered beta of 1.207. 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 Ebusco Holding
Strength
Weakness
Opportunity
Threat
Moving On:
Valuation is only one side of the coin in terms of building your investment thesis, and it 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. Why is the intrinsic value higher than the current share price? For Ebusco Holding, there are three additional items you should look at:
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Risks: We feel that you should assess the 3 warning signs for Ebusco Holding (1 is a bit concerning!) we’ve flagged before making an investment in the company.
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Future Earnings: How does EBUS’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.
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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 ENXTAM every day. If you want to find the calculation for other stocks just search here.
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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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com