Estimation of the intrinsic value of Sanok Rubber Company Spólka Akcyjna (WSE:SNK)
Today, we’ll take a simple look at a valuation method used to estimate the attractiveness of Sanok Rubber Company Spólka Akcyjna (WSE:SNK) as an investment opportunity by projecting its cash flows future cash flows, then discounting them to the present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. There really isn’t much to do, although it may seem quite complex.
Businesses can be valued in many ways, which is why we emphasize that a DCF is not perfect for all situations. If you still have burning questions about this type of assessment, take a look at Simply Wall St.’s analysis template.
Check out our latest review for Sanok Rubber Company Spólka Akcyjna
The model
We use what is called a 2-stage model, which simply means that we have two different periods of company cash flow growth rates. Generally, the first stage is a higher growth phase and the second stage is a lower growth phase. To begin with, we need to obtain cash flow estimates for 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:
Estimated free cash flow (FCF) over 10 years
2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | |
Leveraged FCF (PLN, Millions) | 31.0 million zł | 29.0 million zł | 32.0 million zł | 35.0 million zł | 36.4 million zł | 37.7 million zł | 38.9 million zł | 40.1 million zł | 41.3 million zł | 42.4 million zł |
Growth rate estimate Source | Analyst x1 | Analyst x1 | Analyst x1 | Analyst x1 | Is at 4.05% | Is at 3.57% | Is at 3.24% | Is at 3.01% | Is at 2.85% | Is at 2.74% |
Present value (PLN, millions) discounted at 12% | 27.7 zł | 23.2 zł | 22.9 zł | 22.3 zł | 20.8 zł | 19.2 zł | 17.8 zł | 16.3 zł | 15.0 zł | 13.8 zł |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = 199 million zł
We now need to calculate the terminal value, which represents all future cash flows after this ten-year period. The Gordon Growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average 10-year government bond yield of 2.5%. We discount terminal cash flows to present value at a cost of equity of 12%.
Terminal value (TV)= FCF_{2031} × (1 + g) ÷ (r – g) = zł42m × (1 + 2.5%) ÷ (12%– 2.5%) = zł462m
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= zł462m÷ ( 1 + 12%)^{ten}= zł150m
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 349 million zł. In the last step, we divide the equity value by the number of shares outstanding. Compared to the current share price of 14.0 zł, the company appears 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 a different galaxy. Keep that in mind.
Important assumptions
We emphasize that 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 Sanok Rubber Company Spólka Akcyjna 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 12%, which is based on a leveraged beta of 1.852. 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.
Let’s move on :
While important, the DCF calculation will ideally not be the only piece of analysis you look at for a business. DCF models are not the be-all and end-all of investment valuation. 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, changes in the company’s cost of equity or the risk-free rate can have a significant impact on the valuation. For Sanok Rubber Company Spólka Akcyjna, we have compiled three fundamental factors that you should evaluate:
- Risks: You should be aware of the 4 warning signs for Sanok Rubber Company Spólka Akcyjna we found out before considering an investment in the business.
- Future earnings: How does SNK’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 an updated cash flow valuation for every stock on the WSE every day. 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.
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