A look at the fair value of Betacom SA (WSE:BCM)
Today we are going to give a simple overview of a valuation method used to estimate the attractiveness of Betacom SA (WSE:BCM) as an investment opportunity by projecting its future cash flows, then discounting them to the current value. We will use the Discounted Cash Flow (DCF) model for this purpose. Believe it or not, it’s not too hard to follow, as you’ll see in our example!
We draw your attention to the fact that there are many ways to value a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you want to know more about discounted cash flow, the rationale for this calculation can be read in detail in the Simply Wall St analysis template.
Check out our latest analysis for Betacom
The model
We will use a two-stage DCF model which, as the name suggests, takes into account two stages of growth. The first stage is usually a period of higher growth which stabilizes towards the terminal value, captured in the second period of “sustained growth”. To begin with, we need to obtain cash flow estimates for the next ten years. Since no analyst estimates of free cash flow are available to us, we have extrapolated the previous free cash flow (FCF) from the company’s latest reported value. We assume that companies with decreasing free cash flow will slow their rate of contraction and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow more in early years than in later years.
A DCF is based on the idea that a dollar in the future is worth less 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) Forecast
2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | |
Leveraged FCF (PLN, Millions) | zł1.24m | 1.16 zł | 1.11 mzł | 1.09 zł | 1.08 mzł | 1.09 zł | 1.10 zł | 1.12 zł | 1.14 zł | 1.16 zł |
Growth rate estimate Source | East @ -10.79% | Is @ -6.76% | Is @ -3.94% | Is @ -1.97% | Is @ -0.58% | Is at 0.38% | Is at 1.06% | Is at 1.53% | Is at 1.87% | Is at 2.1% |
Present value (PLN, millions) discounted at 9.0% | 1.1 zł | 1.0 zł | 0.9 zł | 0.8 zł | 0.7 zł | 0.7 zł | 0.6 zł | 0.6 zł | 0.5 zł | 0.5 zł |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = 7.0 million zł
We now need to calculate the terminal value, which represents all future cash flows after this ten-year period. The Gordon Growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average 10-year government bond yield of 2.6%. We discount terminal cash flows to present value at a cost of equity of 9.0%.
Terminal value (TV)= FCF_{2032} × (1 + g) ÷ (r – g) = zł1.2m × (1 + 2.6%) ÷ (9.0%– 2.6%) = zł19m
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= zł19m÷ ( 1 + 9.0%)^{ten}= zł8.0m
The total value, or equity value, is then the sum of the present value of future cash flows, which in this case is 15 million zł. In the last step, we divide the equity value by the number of shares outstanding. Compared to the current share price of 7.2 zł, the company appears approximately at fair value at a discount of 3.7% to the current share price. Ratings are imprecise instruments, however, much like a telescope – move a few degrees and end up in a different galaxy. Keep that in mind.
The hypotheses
The above calculation is highly dependent on two assumptions. One is the discount rate and the other is the cash flows. Part of investing is coming up with your own assessment of a company’s future performance, so try the math yourself and check your own assumptions. The DCF also does not take into account the possible cyclicality of an industry, nor the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we view Betacom 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 factors in debt. In this calculation, we used 9.0%, which is based on a leveraged beta of 1.244. Beta is a measure of a stock’s volatility relative to the market as a whole. We derive our beta from the average industry beta of broadly comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
Let’s move on :
While a business valuation is important, it shouldn’t be the only metric to consider when researching a business. It is not possible to obtain an infallible valuation with a DCF model. Preferably, you would apply different cases and assumptions and see their impact on the valuation of the business. If a company grows at a different pace, or if its cost of equity or risk-free rate changes sharply, output may be very different. For Betacom, you need to assess three relevant elements:
- Risks: For example, we have identified 4 warning signs for Betacom (2 cannot be ignored) which you should be aware of.
- Other strong companies: Low debt, high returns on equity and good past performance are essential to a strong business. Why not explore our interactive list of stocks with strong trading fundamentals to see if there are any other companies you may not have considered!
- Other top analyst picks: Interested to see what the analysts think? Take a look at our interactive list of analysts’ top stock picks to find out what they think could have attractive future prospects!
PS. Simply Wall St updates its DCF calculation for every Polish stock daily, so if you want to find the intrinsic value of any other stock, just search here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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