Elior Group SA (EPA: ELIOR) shares could be 44% lower than their intrinsic value estimate
How far is Elior Group SA (EPA: ELIOR) from its intrinsic value? Using the most recent financial data, we’ll examine whether the stock price is fair by taking expected future cash flows and discounting them to today’s value. Our analysis will use the discounted cash flow (DCF) model. 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.
Remember, however, that there are many ways to estimate the value of a business, and a DCF is just one method. Anyone interested in learning a little more about intrinsic value should read the Simply Wall St.
Discover our latest analysis for Elior Group
Step by step in the calculation
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. To begin with, we need to get cash flow estimates for the next ten years. Where possible, we use analyst estimates, but when these are not available, we extrapolate the previous free cash flow (FCF) from the last estimate or stated 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 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
2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | |
Leverage FCF (€, Millions) | € 75.2m | € 110.5m | 104.0 M € | € 133.0m | 147.8 million euros | € 159.5m | 168.5 M € | 175.4 M € | € 180.5m | 184.4 M € |
Source of estimated growth rate | Analyst x10 | Analyst x9 | Analyst x3 | Analyst x1 | Est @ 11.16% | Est @ 7.91% | Est @ 5.64% | Is 4.05% | Est @ 2.94% | Is @ 2.16% |
Present value (€, Millions) discounted @ 8.2% | € 69.5 | € 94.4 | € 82.2 | € 97.2 | € 99.9 | € 99.7 | € 97.4 | € 93.7 | € 89.2 | € 84.2 |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = 907 M €
The second stage is also known as terminal value, this 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 of the 10-year government bond yield of 0.3%. We discount the terminal cash flows to their present value at a cost of equity of 8.2%.
Terminal value (TV)= FCF_{2031} × (1 + g) ÷ (r – g) = € 184m × (1 + 0.3%) ÷ (8.2% – 0.3%) = € 2.4bn
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= € 2.4bn ÷ (1 + 8.2%)^{ten}= € 1.1bn
The total value is the sum of the cash flows of the next ten years plus the present terminal value, which gives the Total Equity Value, which in this case is 2.0 billion euros. In the last step, we divide the equity value by the number of shares outstanding. Compared to the current share price of € 6.5, the company looks fairly good value with a 44% discount from the current share price. Remember, however, that this is only a rough estimate, and like any complex formula – trash in, trash out.
The hypotheses
The above calculation is very dependent on two assumptions. One is the discount rate and the other is cash flow. 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 or the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we consider Elior Group to be a potential shareholder, 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 8.2%, which is based on a leveraged beta of 1.627. 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 :
While important, calculating DCF shouldn’t be the only metric you look at when looking for a business. DCF models are not the ultimate solution for investment valuation. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under / overvalued?” For example, changes in the company’s cost of equity or the risk-free rate can have a significant impact on valuation. Can we understand why the company trades at a discount to its intrinsic value? For Elior Group, we have compiled three important factors that you should explore:
- Risks: You should be aware of the 1 warning sign for Elior Group we found out before considering an investment in the business.
- Future benefits: How does ELIOR’s growth rate compare with that of its peers and the market at large? Dig deeper into the analyst consensus number for years to come by interacting with our free analyst growth expectations chart.
- 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!
PS. The Simply Wall St app performs a daily discounted cash flow assessment for each ENXTPA share. If you want to find the calculation for other actions, do a search here.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. 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 material. Simply Wall St has no position in the mentioned stocks.
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