Today we will run through one way of estimating the intrinsic value of CropEnergies AG (ETR:CE2) by taking the expected future cash flows and discounting them to their present value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they’re fairly easy to follow.
Remember though, that there are many ways to estimate a company’s value, and a DCF is just one method. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second ‘steady growth’ period. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren’t available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today’s dollars:
10-year free cash flow (FCF) estimate
|Levered FCF (€, Millions)||€102.4m||€70.8m||€84.8m||€80.9m||€78.3m||€76.6m||€75.4m||€74.6m||€74.0m||€73.6m|
|Growth Rate Estimate Source||Analyst x1||Analyst x1||Analyst x1||Est @ -4.57%||Est @ -3.19%||Est @ -2.23%||Est @ -1.56%||Est @ -1.09%||Est @ -0.76%||Est @ -0.53%|
|Present Value (€, Millions) Discounted @ 5.8%||€96.8||€63.2||€71.6||€64.5||€59.0||€54.5||€50.7||€47.4||€44.5||€41.8|
(“Est” = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = €594m
The second stage is also known as Terminal Value, this is the business’s cash flow 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 have used the 5-year average of the 10-year government bond yield (0.01%) to estimate future growth. In the same way as with the 10-year ‘growth’ period, we discount future cash flows to today’s value, using a cost of equity of 5.8%.
Terminal Value (TV)= FCF2030 × (1 + g) ÷ (r – g) = €74m× (1 + 0.01%) ÷ (5.8%– 0.01%) = €1.3b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= €1.3b÷ ( 1 + 5.8%)10= €719m
The total value is the sum of…
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