A look at the intrinsic value of Vinte Viviendas Integrales, SAB de CV (BMV: VINTE)
Does the June course of Vinte Viviendas Integrales, SAB de CV (BMV: VINTE) reflect what it is really worth? Today we’re going to estimate the intrinsic value of the stock by taking expected future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Before you think you won’t be able to figure it out, read on! It’s actually a lot less complex than you might imagine.
We draw your attention to the fact that there are many ways to assess a business and, like DCF, each technique has advantages and disadvantages in certain scenarios. If you still have burning questions about this type of valuation, take a look at the Simply Wall St.
See our latest review for Vinte Viviendas Integrales. of
We use what is called a two-step model, which simply means that we have two different periods of growth rate for the cash flow of the business. Usually the first stage is higher growth and the second stage is lower growth stage. In the first step, we need to estimate the cash flow of the business over the next ten years. Since no free cash flow analyst estimate is available, we have extrapolated the previous free cash flow (FCF) from the last reported value of the company. 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 down more in the early years than in subsequent years.
A DCF is based on the idea that a dollar in the future is worth less than a dollar today, so we discount the value of those future cash flows to their estimated value in today’s dollars. hui:
10-year free cash flow (FCF) forecast
|Leverage FCF (MX $, Millions)||384.3 million Mexican dollars||495.6 million Mexican dollars||Mex $ 606.4m||714.2 million Mexican dollars||Mexican $ 818.1 million||Mex $ 918.6m||1.02 billion Mexican dollars||Mexican $ 1.11 billion||1.21 billion Mexican dollars||1.31 billion Mexican dollars|
|Source of estimated growth rate||East @ 38.36%||Est @ 28.96%||East @ 22.37%||Est @ 17.77%||Est @ 14.54%||Est @ 12.29%||Est @ 10.71%||East @ 9.6%||Est @ 8.83%||East @ 8.28%|
|Present value (MX $, Millions) discounted at 16%||Mex $ 330||Mex $ 366||Mex $ 385||Mex $ 390||Mex $ 384||Mex $ 371||Mex $ 353||Mex $ 333||Mex $ 311||290 Mex.|
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = 3.5 billion Mexican dollars
The second stage is also known as terminal value, this is the cash flow of the business 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 used the 5-year average of the 10-year government bond yield (7.0%) to estimate future growth. Similar to the 10-year “growth” period, we discount future cash flows to their present value, using a cost of equity of 16%.
Terminal value (TV)= FCF2030 × (1 + g) ÷ (r – g) = 1.3 billion Mexican dollars × (1 + 7.0%) ÷ (16% – 7.0%) = 15 billion Mexican dollars
Present value of terminal value (PVTV)= TV / (1 + r)ten= Mex $ 15b ÷ (1 + 16%)ten= 3.3 billion Mexican dollars
Total value, or net worth, is then the sum of the present value of future cash flows, which in this case is Mex 6.8 billion. In the last step, we divide the equity value by the number of shares outstanding. From the current share price of $ 28.5, the company appears to be roughly at fair value with a 9.9% discount to the current share price. The assumptions in any calculation have a big impact on the valuation, so it’s best to take this as a rough estimate, not precise down to the last penny.
Now the most important inputs to a discounted cash flow are the discount rate and, of course, the actual cash flow. If you don’t agree with these results, try the calculation yourself and play with the assumptions. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a full picture of a company’s potential performance. Since we are looking at Vinte Viviendas Integrales. 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 16%, which is based on a leveraged beta of 1.483. Beta is a measure of the volatility of a stock relative to the market as a whole. We get our average beta from the industry beta of comparable companies globally, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
To move on :
Valuation is only one side of the coin in terms of building your investment thesis, and it’s just one of the many factors you need to evaluate for a business. It is not possible to achieve a rock-solid valuation with a DCF model. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to undervaluation or overvaluation of the company. For example, changes in the company’s cost of equity or the risk-free rate can have a significant impact on valuation. For Vinte Viviendas Integrales. de, there are three relevant factors that you should consider further:
- Risks: Consider, for example, the ever-present specter of investment risk. We have identified 3 warning signs with Vinte Viviendas Integrales. of (at least 1 which is potentially serious), and understanding them should be part of your investment process.
- Other high quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality stocks to get a feel for what you might be missing!
- Other environmentally friendly companies: Are you concerned about the environment and think that consumers will buy more and more environmentally friendly products? Browse our interactive list of companies thinking about a greener future to discover stocks you may not have thought of!
PS. Simply Wall St updates its DCF calculation for every Mexican stock every day, 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. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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