Fair value estimate of the Segezha Public Joint Stock Company group of companies (MCX: SGZH)


In this article, we will estimate the intrinsic value of the Segezha Public Joint Stock Company (MCX: SGZH) group of companies by projecting its future cash flows and then discounting them to present value. To this end, we will take advantage of the Discounted Cash Flow (DCF) model. Don’t be put off by the lingo, the underlying calculations are actually pretty straightforward.

Remember, however, that there are many ways to estimate the value of a business and that a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should read the Simply Wall St.

See our latest analysis for the Segezha group of companies

What is the estimated valuation?

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”. First, we need to estimate the cash flow of the business over 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.

A DCF is based on the idea that a dollar in the future is worth less than a dollar today, so we need to discount the sum of these future cash flows to arrive at an estimate of the present value:

10-year free cash flow (FCF) forecast

2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Leverage FCF (RUB, Millions) ₽6.14b ₽9.67b ₽17.4b ₽22.8b ₽27.2b ₽31.4b ₽35.6b ₽39.7b ₽43.7b ₽47.8b
Source of estimated growth rate Analyst x4 Analyst x4 Analyst x4 Analyst x4 Est @ 19.33% Est @ 15.72% East @ 13.2% Est @ 11.44% Is 10.2% Est @ 9.34%
Present value (RUB, millions) discounted at 18% 5.2k ₽6.9k ₽10.6k 11.7k 11.8k ₽11.6k 11.1k 10.4k ₽9.7k 9.0k

(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = 98b

After calculating the present value of future cash flows over the initial 10 year period, we need to calculate the terminal value, which takes into account all future cash flows beyond the first step. The Gordon growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 7.3%. We discount the terminal cash flows to their present value at a cost of equity of 18%.

Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = 48b × (1 + 7.3%) ÷ (18% – 7.3%) = ₽474b

Present value of terminal value (PVTV)= TV / (1 + r)ten= ₽474b ÷ (1 + 18%)ten= 89b

Total value, or net worth, is then the sum of the present value of future cash flows, which in this case is ₽187b. In the last step, we divide the equity value by the number of shares outstanding. From the current share price of 10.9, the company is shown at fair value at a discount of 8.4% from the current share price. Ratings are imprecise instruments, however, much like a telescope – move a few degrees and end up in another galaxy. Keep this in mind.

MISX Discounted Cash Flows: SGZH December 24, 2021

The hypotheses

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. Part of investing is coming up with your own assessment of a company’s future performance, so try the math yourself and check your own 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 the Segezha group of companies 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 into account debt. In this calculation, we used 18%, which is based on a leveraged beta of 1.738. 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:

Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn’t be the only metric you look at when researching a business. It is not possible to achieve a rock-solid valuation with a DCF model. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under / overvalued?” If a business grows at a different rate, or if its cost of equity or risk-free rate changes sharply, output can be very different. For the Segezha group of companies, we have compiled three important things that you should take a closer look at:

  1. Risks: Take risks, for example – Segezha group of companies has 3 warning signs (and 2 which are a bit disturbing) we think you should know about.
  2. Future benefits: How does SGZH’s growth rate compare to that of its peers and the broader market? Dig deeper into the analyst consensus number for years to come by interacting with our free analyst growth expectations chart.
  3. Other high quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality stocks to get a feel for what you might be missing!

PS. Simply Wall St updates its DCF calculation for every Russian stock every day, 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 using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock 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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