Is there an opportunity with Promotora y Operadora de Infraestructura, SAB de CV (BMV: PINFRA) 36% undervaluation?
Does the November course of Promotora y Operadora de Infraestructura, SAB de CV (BMV: PINFRA) 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 today’s value. Our analysis will use the discounted cash flow (DCF) model. Don’t be put off by the lingo, the underlying calculations are actually pretty straightforward.
There are many ways businesses can be assessed, so we would like to point out that a DCF is not perfect for all situations. For those who are passionate about equity analysis, the Simply Wall St analysis template here may be something of interest to you.
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Step by step in the calculation
We use the 2-step growth model, which simply means that we take into account two stages of business growth. During the initial period, the business can have a higher growth rate and the second stage is usually assumed to have a stable growth rate. 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 latest 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) estimate
2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | |
Leverage FCF (MX $, Millions) | Mex $ 5.44 billion | Mex $ 6.63b | Mex $ 7.44b | Mex $ 8.03b | 8.60 billion Mexican dollars | Mex $ 9.21b | Mex $ 9.86b | 10.6 billion Mexican dollars | 11.3 billion Mexican dollars | 12.1 billion Mexican dollars |
Source of estimated growth rate | Analyst x4 | Analyst x4 | Analyst x2 | Analyst x2 | Est @ 7.08% | Est @ 7.09% | Est @ 7.09% | Est @ 7.09% | Is 7.1% | Is 7.1% |
Present value (MX $, millions) discounted at 14% | Mex $ 4.8k | Mex $ 5.1k | Mex $ 5.1k | Mex $ 4.8k | Mex $ 4.5k | 4.3k Mex. | Mex $ 4.0k | Mex $ 3.8k | Mex $ 3.6k | 3.4k Mex. |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = 43 billion Mexican dollars
After calculating the present value of future cash flows over the initial 10 year period, we need to calculate the terminal value, which takes into account all future cash flows beyond the first step. 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 (7.1%) 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 14%.
Terminal value (TV)= FCF_{2031} × (1 + g) ÷ (r – g) = Mex $ 12B × (1 + 7.1%) ÷ (14% – 7.1%) = Mex $ 199B
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= 199 Mex $ ÷ (1 + 14%)^{ten}= 55 billion Mexican dollars
The total value is the sum of the cash flows for the next ten years plus the final present value, which gives the total value of equity, which in this case is Mex $ 99 billion. In the last step, we divide the equity value by the number of shares outstanding. Compared to the current share price of $ 148 Mex, the company looks fairly good value with a 36% discount from 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. You don’t have to agree with these entries, I recommend that you redo the math yourself and play around with it. 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 Promotora y Operadora de Infraestructura SAB de C. V 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 represents debt. In this calculation, we used 14%, which is based on a leveraged beta of 1.141. 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 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 is just one of the many factors you need to assess for a business. It is not possible to achieve a rock-solid valuation with a DCF model. Preferably, you would apply different cases and assumptions and see their impact on the valuation of the business. For example, if the terminal value growth rate is adjusted slightly, it can dramatically change the overall result. What is the reason why the stock price is below intrinsic value? For Promotora y Operadora de Infraestructura SAB de C. V, you need to assess three essential factors:
- Risks: Note that Promotora y Operadora de Infraestructura SAB de C. V shows 1 warning sign in our investment analysis , you must know…
- Future benefits: How does PINFRA * ‘s growth rate compare to 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 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 BMV share. If you want to find the calculation for other actions, just 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 documents. Simply Wall St has no position in any of the stocks mentioned.
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