Estimate of the fair value of Bolloré SE (EPA: BOL)
Today we’re going to walk through one way to estimate the intrinsic value of Bolloré SE (EPA: BOL) by projecting its future cash flows and then discounting them to today’s value. Our analysis will use the discounted cash flow (DCF) model. It may sound complicated, but it’s actually quite simple!
Remember, however, that there are many ways to estimate the value of a business and that a DCF is just one method. If you are interested in knowing more about discounted cash flow, the rationale for this calculation can be read in detail in the Simply Wall St.
See our latest analysis for Bolloré
The method
We are going to use a two-step 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 “steady growth”. First, we need to estimate the cash flow of the business over 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.
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) estimate
2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | |
Leverage FCF (€, Millions) | € 1.64 billion | € 973.7 M | € 934.6m | 909.3 M € | 893.0 million euros | 882.6 million euros | 876.4 M € | € 873.0 M | 871.5 M € | 871.3 M € |
Source of estimated growth rate | Analyst x2 | Analyst x1 | Is @ -4.02% | East @ -2.71% | Is @ -1.79% | Is @ -1.15% | East @ -0.71% | East @ -0.39% | East @ -0.17% | East @ -0.02% |
Present value (€, Millions) discounted at 7.0% | € 1.5k | € 851 | € 764 | € 694 | € 638 | € 589 | € 547 | € 509 | € 475 | € 444 |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = 7.0 billion euros
The second stage is also known as terminal value, it 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 (0.3%) 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 7.0%.
Terminal value (TV)= FCF_{2031} × (1 + g) ÷ (r – g) = € 871m × (1 + 0.3%) ÷ (7.0% – 0.3%) = € 13bn
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= € 13bn ÷ (1 + 7.0%)^{ten}= € 6.7bn
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 14 billion euros. In the last step, we divide the equity value by the number of shares outstanding. Compared to the current share price of 4.4 €, the company appears at its fair value with a discount of 6.3% compared 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.
Important assumptions
Now, the most important inputs to a discounted cash flow are the discount rate and, of course, the actual 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 full picture of a company’s potential performance. Since we consider Bolloré 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 7.0%, which is based on a leveraged beta of 1.381. Beta is a measure of the volatility of a stock relative to the market as a whole. We get our beta from the industry average beta from globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
Next steps:
Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn’t be the only metric you look at when researching a business. The DCF model is not a perfect stock assessment tool. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under / overvalued?” If a business grows at a different rate, or if its cost of equity or risk-free rate changes sharply, output can be very different. For Bolloré, we have gathered three essential elements to assess:
- Financial health: Does BOL have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
- Future benefits: How does BOL’s growth rate compare to that of its peers and the broader market? Dig deeper into the analyst consensus number for years to come by interacting with our free analyst growth expectations chart.
- Other strong companies: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid trading fundamentals to see if there are other companies you may not have considered!
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, 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 using only 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 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 any of the stocks mentioned.