LNA Santé SA (EPA: LNA) shares could be 43% lower than their estimate of intrinsic value
Does the stock price of LNA SantÃ© SA (EPA: LNA) in June reflect its real value? 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. To this end, we will take advantage of 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. For those who are passionate about equity analysis, the Simply Wall St analysis template here may be something of interest to you.
Check out our latest analysis for LNA SantÃ©
Crunch the numbers
We use the 2-step growth model, which simply means that we take into account two stages of business growth. In 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 estimate the next ten years of cash flow. 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.
In general, we assume that a dollar today is worth more than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at an estimate of the present value:
10-year Free Cash Flow (FCF) estimate
2021 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | |
Leverage FCF (â‚¬, Millions) | â‚¬ 70.6m | 78.8 M â‚¬ | â‚¬ 85.3m | â‚¬ 76.1m | â‚¬ 70.4m | â‚¬ 66.8m | â‚¬ 64.5m | â‚¬ 63.0m | â‚¬ 62.1m | â‚¬ 61.5m |
Source of estimated growth rate | Analyst x5 | Analyst x5 | Analyst x4 | Is @ -10.77% | Is @ -7.43% | Is @ -5.09% | Is @ -3.46% | East @ -2.31% | Is @ -1.51% | Est @ -0.95% |
Present value (â‚¬, Millions) discounted @ 8.0% | â‚¬ 65.4 | â‚¬ 67.6 | â‚¬ 67.7 | â‚¬ 56.0 | â‚¬ 48.0 | â‚¬ 42.2 | â‚¬ 37.7 | â‚¬ 34.1 | â‚¬ 31.2 | â‚¬ 28.6 |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = 478 M â‚¬
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 0.4%. We discount the terminal cash flows to their present value at a cost of equity of 8.0%.
Terminal value (TV)= FCF_{2030} Ã— (1 + g) Ã· (r – g) = â‚¬ 61m Ã— (1 + 0.4%) Ã· (8.0% – 0.4%) = â‚¬ 812m
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= â‚¬ 812m Ã· (1 + 8.0%)^{ten}= 377 M â‚¬
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 â‚¬ 855m. To get the intrinsic value per share, we divide it by the total number of shares outstanding. Compared to the current share price of â‚¬ 51.0, the company looks fairly good value with a 43% 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.
The hypotheses
We draw your attention to the fact that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. You don’t have to agree with these entries, I recommend that you redo the calculations yourself and play with them. 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 LNA SantÃ© to be 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 into account debt. In this calculation, we used 8.0%, which is based on a leveraged beta of 1.462. 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.
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. It is not possible to achieve a rock-solid valuation with a DCF model. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under / overvalued?” For example, if the terminal value growth rate is adjusted slightly, it can dramatically change the overall result. Why is intrinsic value greater than the current share price? For LNA Health, we have compiled three additional factors that you should take a closer look at:
- Risks: For example, we discovered 3 warning signs for LNA SantÃ© (1 is significant!) That you should know before investing here.
- Future benefits: How does LNA’s growth rate compare to that of its peers and the broader market? Dig deeper into the analyst consensus count 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 might 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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