Calculation of the intrinsic value of Intexa SA (EPA:ITXT)

Today we are going to walk through a way to estimate the intrinsic value of Intexa SA (EPA:ITXT) by estimating the company’s future cash flows and discounting them to their present value. Our analysis will use the discounted cash flow (DCF) model. Patterns like these may seem beyond a layman’s comprehension, but they’re pretty easy to follow.

Businesses can be valued in many ways, which is why we emphasize that a DCF is not perfect for all situations. For those who are passionate about stock analysis, the Simply Wall St analysis template here may interest you.

See our latest analysis for Intexa

What is the estimated valuation?

We will use a two-stage 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 “sustained growth”. To begin with, we need to obtain cash flow estimates for the next ten years. Since no analyst estimate of free cash flow is available, we have extrapolated the previous free cash flow (FCF) from the company’s latest 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) €158.9 thousand €160.4 thousand €161.7k €162.7k €163.6k €164.4k €165.1k €165.8k €166.5k €167.1k
Growth rate estimate Source Is at 1.22% Is 0.96% Is at 0.77% Is at 0.64% Is at 0.55% Is at 0.49% Is at 0.44% Is at 0.41% Is at 0.39% Is at 0.38%
Present value (€, millions) discounted at 4.2% €0.2 €0.1 €0.1 €0.1 €0.1 €0.1 €0.1 €0.1 €0.1 €0.1

(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = €1.0m

The second stage is also known as the terminal value, it is the cash flow of the business after the first stage. 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 (0.3%) 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 4.2%.

Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = €167k × (1 + 0.3%) ÷ (4.2%– 0.3%) = €4.4m

Present value of terminal value (PVTV)= TV / (1 + r)ten= €4.4m÷ ( 1 + 4.2%)ten= €2.9 million

The total value, or equity value, is then the sum of the present value of future cash flows, which in this case is €3.9 million. To get the intrinsic value per share, we divide it by the total number of shares outstanding. Compared to the current share price of €3.1, the company appears to be approximately fair value at a 20% discount to the current share price. Ratings are imprecise instruments, however, much like a telescope – move a few degrees and end up in another galaxy. Keep that in mind.

ENXTPA: ITXT Discounted Cash Flow January 15, 2022

Important assumptions

Now, the most important inputs to a discounted cash flow are the discount rate and, of course, the actual 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 Intexa 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 4.2%, which is based on a leveraged beta of 0.800. 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 a business valuation is important, it shouldn’t be the only metric to consider when researching a business. The DCF model is not a perfect stock valuation tool. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, if the terminal value growth rate is adjusted slightly, it can significantly change the overall result. For Intexa, there are three relevant elements that you should examine in more detail:

  1. Risks: Every business has them, and we’ve spotted 5 warning signs for Intexa (including 4 potentially serious!) that you should be aware of.
  2. Other strong companies: Low debt, high returns on equity and good past performance are essential to a strong business. Why not explore our interactive list of stocks with strong trading fundamentals to see if there are any other companies you may not have considered!
  3. Other top analyst picks: Interested to see what the analysts think? Take a look at our interactive list of analysts’ top stock picks to find out what they think could have attractive future prospects!

PS. Simply Wall St updates its DCF calculation for every French stock daily, so if you want to find the intrinsic value of any other stock, just search here.

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.

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