A look at the fair value of Enel Chile SA (SNSE:ENELCHILE)
Today we are going to walk through a way to estimate the intrinsic value of Enel Chile SA (SNSE:ENELCHILE) by projecting its future cash flows and then discounting them to the present value. One way to do this is to use the discounted cash flow (DCF) model. There really isn’t much to do, although it may seem quite complex.
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. Anyone interested in learning a little more about intrinsic value should read the Simply Wall St.
Our analysis indicates that ENELCHILE is potentially overvalued!
What is the estimated value?
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”. In the first step, we need to estimate the company’s cash flow over the next ten years. Wherever possible, we use analysts’ estimates, but where these are not available, we extrapolate the previous free cash flow (FCF) from the latest estimate or 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.
Generally, we assume that a dollar today is worth more than a dollar in the future, 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 (CLP, Millions) | CL$97.4 billion | CL$112.6 billion | CL$125.7 billion | CL$138.9 billion | CL$152.5 billion | CL$166.5 billion | CL$181.1 billion | CL$196.5 billion | CL$212.9 billion | CL$230.4 billion |
Growth rate estimate Source | Analyst x1 | Analyst x1 | Is at 11.66% | Is at 10.53% | Is at 9.74% | Is at 9.18% | Is at 8.8% | Is at 8.52% | Is at 8.33% | Is at 8.2% |
Present value (CLP, millions) discounted at 13% | CL$86,100 | CL$88,000 | CL$86,800 | CL$84.9k | CL$82,300 | CL$79,500 | CL$76,400 | CL$73,300 | CL$70,200 | CL$67,200 |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = CL$795 billion
The second stage is also known as the terminal value, it is the cash flow of the business after the first stage. 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 7.9%. We discount terminal cash flows to present value at a cost of equity of 13%.
Terminal value (TV)= FCF_{2032} × (1 + g) ÷ (r – g) = CL$230b × (1 + 7.9%) ÷ (13%– 7.9%) = CL$4.8t
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= CL$4.8t÷ ( 1 + 13%)^{ten}= 1.4 CL$ tons
The total value is the sum of the cash flows for the next ten years plus the present terminal value, which gives the total equity value, which in this case is CL$2.2 billion. To get the intrinsic value per share, we divide it by the total number of shares outstanding. From the current share price of CL$31.6, the company appears around fair value at the time of writing. Remember though that this is only a rough estimate, and like any complex formula – trash in, trash out.
The hypotheses
Now, the most important inputs to a discounted cash flow are the discount rate and, of course, the actual cash flows. If you disagree with these results, try the math yourself and play around with the 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 consider Enel Chile 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 takes debt into account. In this calculation, we used 13%, which is based on a leveraged beta of 0.959. 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.
Look forward:
While important, calculating DCF shouldn’t be the only metric to consider when researching a business. DCF models are not the be-all and end-all of investment valuation. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under/overvalued?” 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 Enel Chile, there are three important elements to consider:
- Risks: For example, we have identified 4 warning signs for Enel Chile (1 makes us a little uneasy) that you should be aware of.
- Future earnings: How does ENELCHILE’s growth rate compare to its peers and the market in general? Dive deeper into the analyst consensus figure for the coming years by interacting with our free analyst growth forecast chart.
- 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!
PS. The Simply Wall St app performs an updated cash flow assessment for each stock on the SNSE every day. If you want to find the calculation for other stocks, search here.
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Find out if Enel Chile is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.
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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.