Estimated fair value of Atomenergoremont PLC (BUL:ATOM)
Today we are going to walk through a way to estimate the intrinsic value of Atomenergoremont PLC (BUL:ATOM) by estimating the future cash flows of the business and discounting them to their present value. This will be done using the discounted cash flow (DCF) model. Believe it or not, it’s not too hard to follow, as you’ll see in our example!
Businesses can be valued in many ways, which is why we emphasize that a DCF is not perfect for all situations. Anyone interested in learning a little more about intrinsic value should read the Simply Wall St.
Discover our latest analyzes for Atomenergoremont
The calculation
We use what is called a 2-step model, which simply means that we have two different periods of company cash flow growth rates. Generally, the first stage is a higher growth phase and the second stage is a lower growth phase. To begin with, we need to obtain cash flow estimates for the next ten years. Since no analyst estimate of free cash flow is available, 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:
Estimated free cash flow (FCF) over 10 years
2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | |
Leveraged FCF (BGN, Millions) | лв9.53m | лв7.90m | лв6.98m | лв6.43m | лв6.09m | лв5.88m | лв5.75m | лв5.68m | лв5.64m | лв5.63m |
Growth rate estimate Source | Is @ -24.77% | East @ -17.08% | East @ -11.7% | East @ -7.93% | East @ -5.29% | Is @ -3.45% | Is @ -2.16% | Is @ -1.25% | Is @ -0.62% | East @ -0.17% |
Present value (BGN, millions) discounted at 7.5% | лв8.9 | лв6.8 | лв5.6 | лв4.8 | лв4.2 | лв3.8 | лв3.5 | лв3.2 | лв3.0 | лв2.7 |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = лв46m
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 0.9%. We discount terminal cash flows to present value at a cost of equity of 7.5%.
Terminal value (TV)= FCF_{2032} × (1 + g) ÷ (r – g) = лв5.6m × (1 + 0.9%) ÷ (7.5%– 0.9%) = лв86m
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= лв86m÷ ( 1 + 7.5%)^{ten}= лв42m
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 88 million euros. To get the intrinsic value per share, we divide it by the total number of shares outstanding. From the current share price of £5.5, the company appears to be roughly fair value at a 3.8% discount to where the share price is currently trading. 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 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 Atomenergoremont 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 7.5%, which is based on a leveraged beta of 1.136. 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, the DCF calculation will ideally not be the only piece of analysis you look at for a business. DCF models are not the be-all and end-all of investment valuation. Preferably, you would apply different cases and assumptions and see their impact on the valuation of the business. For example, changes in the company’s cost of equity or the risk-free rate can have a significant impact on the valuation. For Atomenergoremont, there are three other aspects to consider:
- Risks: Take risks, for example – Atomenergoremont a 3 warning signs (and 2 that can’t be ignored) that we think you should know about.
- 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. The Simply Wall St app performs an updated cash flow valuation for every stock on the BUL every day. If you want to find the calculation for other stocks, 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.