Shares of Wiit SpA (BIT:WIIT) could be 28% above their intrinsic value estimate
Today we are going to walk through a way to estimate the intrinsic value of Wiit SpA (BIT:WIIT) by taking the expected future cash flows of the business and discounting them to the present value. Our analysis will use 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.
See our latest review for Wiit
The calculation
We use the 2-stage growth model, which simply means that we consider two stages of business growth. In the initial period, the company may have a higher growth rate, and the second stage is generally assumed to have a stable growth rate. In the first step, we need to estimate the company’s cash flow over the next ten years. Wherever possible, we use analysts’ estimates, but where these are not available, we extrapolate the previous free cash flow (FCF) from the latest estimate or 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.
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) Forecast
2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | |
Leveraged FCF (€, Millions) | €15.5 million | €22.8 million | €28.4 million | €33.5 million | €37.9 million | €41.5 million | €44.5m | €47.0m | €49.1m | €50.9 million |
Growth rate estimate Source | Analyst x5 | Analyst x5 | Is at 24.85% | East @ 17.9% | Is at 13.04% | Is at 9.63% | Is at 7.25% | Is at 5.58% | Is at 4.41% | Is at 3.6% |
Present value (€, millions) discounted at 8.8% | 14.3 € | 19.2 € | 22.1 € | 23.9 € | 24.9 € | 25.1 € | 24.7 € | €24.0 | 23.0 € | 21.9 € |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = €223m
We now need to calculate the terminal value, which represents all future cash flows after this ten-year period. For a number of reasons, a very conservative growth rate is used which 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 (1.7%) to estimate future growth. Similar to the 10-year “growth” period, we discount future cash flows to present value, using a cost of equity of 8.8%.
Terminal value (TV)= FCF_{2031} × (1 + g) ÷ (r – g) = €51m × (1 + 1.7%) ÷ (8.8%–1.7%) = €729m
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= €729m÷ ( 1 + 8.8%)^{ten}= €314m
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 537 million euros. To get the intrinsic value per share, we divide it by the total number of shares outstanding. Compared to the current share price of €26.0, the company appears slightly overvalued at the time of writing. Remember though that this is only a rough estimate, and like any complex formula – trash in, trash out.
Important assumptions
The above calculation is highly dependent on two assumptions. One is the discount rate and the other is the 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 Wiit 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 8.8%, which is based on a leveraged beta of 1.105. 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.
Next steps:
While important, the DCF calculation will ideally not be the only piece of analysis you look at for a business. The DCF model is not a perfect stock valuation tool. Preferably, you would apply different cases and assumptions and see their impact on the valuation of the business. If a company grows at a different rate, or if its cost of equity or risk-free rate changes sharply, output may be very different. What is the reason why the stock price exceeds the intrinsic value? For Wiit, there are three additional things you should research further:
- Risks: Take risks, for example – Wiit a 5 warning signs (and 1 which is a little obnoxious) that we think you should know about.
- Future earnings: How does WIIT’s growth rate compare to its peers and the market in general? Dive deeper into the analyst consensus figure for the coming years by interacting with our free analyst growth forecast chart.
- Other high-quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality actions to get an idea of what you might be missing!
PS. The Simply Wall St app performs a daily updated cash flow valuation for each stock on the BIT. 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.