Today I will be providing a simple run through of a valuation method used to estimate the attractiveness of Meyer Burger Technology AG (SWX:MBTN) as an investment opportunity
by taking the foreast future cash flows of the company and discounting them back to today’s value.
I will be using the
discounted cash flows (DCF)
It may sound complicated, but actually it is quite simple!
Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
If you are reading this and its not June 2018 then I highly recommend you check out the latest calculation for Meyer Burger Technology by following the link below.
Check out our latest analysis for Meyer Burger Technology
What’s the value?
I’m using the 2-stage growth model, which simply means we take in account two stages of company’s growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have perpetual stable growth rate.
To begin with we have to get estimates of the next five years of cash flows.
For this I used the consensus of the analysts covering the stock, as you can see below.
The sum of these cash flows is then discounted to today’s value.
5-year cash flow forecast
|Levered FCF (CHF, Millions)||CHF31.35||CHF49.10||CHF65.96||CHF84.04||CHF83.02|
|Source||Analyst x2||Analyst x3||Analyst x3||Analyst x2||Analyst x2|
|Present Value Discounted @ 11.28%||CHF28.17||CHF39.65||CHF47.87||CHF54.81||CHF48.65|
Present Value of 5-year Cash Flow (PVCF)= CHF219.15m
The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage.
The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 3.7%. We discount this to today’s value at a cost of equity of 11.3%.
Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = CHF83.02m
× (1 + 3.7%) ÷ (11.3% – 3.7%) = CHF1.14b
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = CHF1.14b / ( 1 + 11.3%)5 = CHF666.71m
The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value,
which in this case is CHF885.85m.
The last step is to then divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) then we use the equivalent number.
This results in an intrinsic value of CHF1.44.
to the current share price of CHF1.03, the stock is
about right, perhaps slightly undervalued
at a 28.66% discount to what it is available for right now.
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows.
You don’t have to agree with my inputs, I recommend redoing the calculations yourself and playing with them.
Because we are looking at Meyer Burger Technology as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt.
In this calculation I’ve used 11.3%, which is based on a levered beta of 1.203. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
Whilst important, DCF calculation
shouldn’t be the only metric you look at when researching a company.
What is the reason for the share price to differ from the intrinsic value?
- Financial Health: Does MBTN have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
- Future Earnings: How does MBTN’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
- Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of MBTN? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the SWX every 6 hours. If you want to find the calculation for other stocks just search here.
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