A look at the intrinsic value of KGHM Polska Miedz SA (WSE: KGH)


How far is KGHM Polska Miedz SA (WSE: KGH) from its intrinsic value? Using the most recent financial data, we’ll examine whether the stock price is fair by taking the company’s future cash flow forecast and discounting it to today’s value. To this end, we will take advantage of the Discounted Cash Flow (DCF) model. It may sound complicated, but it’s actually quite simple!

We draw your attention to the fact that there are many ways to assess a business and, like DCF, each technique has advantages and disadvantages in certain scenarios. If you want to know more about discounted cash flow, the rationale for this calculation can be read in detail in the Simply Wall St.

Check out our latest review for KGHM Polska Miedz

The model

We are going to use a two-step DCF model, which, as the name suggests, takes into account two stages of growth. The first stage is usually a period of higher growth which stabilizes towards the terminal value, captured in the second period of “steady growth”. 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 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 discount the value of these future cash flows to their estimated value in today’s dollars:

10-year Free Cash Flow (FCF) estimate

2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Leverage FCF (PLN, Millions) zł2.30b zł2.79b zł2.84b zł2.30b zł2.00b zł1.84b zł1.75b zł1.70b zł1.68b zł1.68b
Source of estimated growth rate Analyst x3 Analyst x3 Analyst x2 Analyst x2 Is @ -12.84% Is @ -8.24% Is @ -5.02% East @ -2.77% Is @ -1.19% East @ -0.09%
Present value (PLN, millions) discounted at 8.6% zł2.1k zł2.4k zł2.2k zł1.7k zł1.3k zł1.1k zł982 zł879 z800 zł736

(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = zł14b

We now need to calculate the Terminal Value, which takes into account 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 (2.5%) 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 8.6%.

Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = zÅ‚1.7b × (1 + 2.5%) ÷ (8.6% – 2.5%) = zÅ‚28b

Present value of terminal value (PVTV)= TV / (1 + r)ten= zł28b ÷ (1 + 8.6%)ten= zł12b

The total value, or net worth, is then the sum of the present value of future cash flows, which in this case is zÅ‚27b. In the last step, we divide the equity value by the number of shares outstanding. Compared to the current share price of 141z, the company appears to be around fair value at the time of writing. Ratings are imprecise instruments, however, much like a telescope – move a few degrees and end up in another galaxy. Keep this in mind.

WSE Discounted Cash Flows: KGH December 1, 2021

Important assumptions

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. If you don’t agree with these results, try the calculation yourself and play 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 full picture of a company’s potential performance. Since we consider KGHM Polska Miedz 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 8.6%, which is based on a leveraged beta of 1.195. 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.

Looking forward:

While important, calculating DCF shouldn’t be the only metric you look at when looking for a business. The DCF model is not a perfect stock assessment tool. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to undervaluation or overvaluation of the company. For example, if the terminal value growth rate is adjusted slightly, it can dramatically change the overall result. For KGHM Polska Miedz, we have compiled three fundamental elements that you should research further:

  1. Risks: We think you should evaluate the 3 warning signs for KGHM Polska Miedz (1 this is a bit unpleasant!) We reported before investing in the company.
  2. Future benefits: How does KGH’s growth rate compare to that of its peers and the wider market? Dig deeper into the analyst consensus number for years to come by interacting with our free analyst growth expectations chart.
  3. 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 WSE share. If you want to find the calculation for other actions, just search here.

Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.

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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