Today we are going to do a simple overview of a valuation method used to estimate the attractiveness of Elektro Maribor dd (LJSE:EMAG) as an investment opportunity by estimating cash flow company’s future and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Don’t be put off by the jargon, the underlying calculations are actually quite simple.
We draw your attention to the fact that there are many ways to value a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. Anyone interested in learning a little more about intrinsic value should read the Simply Wall St.
Our analysis indicates that EMAG is potentially undervalued!
As Elektro Maribor dd operates in the electric utility business, we have to calculate the intrinsic value slightly differently. Instead of using free cash flow, which is difficult to estimate and often not reported by industry analysts, dividend payments per share (DPS) are used. Unless a company pays the majority of its FCF as a dividend, this method will generally underestimate the value of the stock. We use Gordon’s growth model, which assumes that the dividend will grow in perpetuity at a rate that can be sustained. For a number of reasons, a very conservative growth rate is used which cannot exceed that of a company’s Gross Domestic Product (GDP). In this case, we used the 5-year average of the 10-year government bond yield (0.6%). The expected dividend per share is then discounted to its present value at a cost of equity of 5.9%. Compared to the current share price of €2.5, the company appears to be approximately fair value at a 9.4% 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.
Value per share = Expected dividend per share / (Discount rate – Perpetual growth rate)
= €0.1 / (5.9% – 0.6%)
We emphasize that 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 these entries, I recommend that you redo the calculations yourself and play around with them. The DCF also does not take into account the possible cyclicality of an industry, nor the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we consider Elektro Maribor dd 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 5.9%, 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.
SWOT analysis for Elektro Maribor dd
- Earnings growth over the past year has exceeded its 5-year average.
- Debt is well covered by income.
- Earnings growth over the past year has lagged that of the electric utility industry.
- The dividend is low compared to the top 25% dividend payers in the electric utility market.
- The current stock price is below our estimate of fair value.
- The lack of analyst coverage makes it difficult to determine EMAG’s earnings outlook.
- Debt is not well covered by operating cash flow.
Although the valuation of a business is important, it will ideally not be the only piece of analysis you will look at for 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 Elektro Maribor dd, we have compiled three relevant aspects that you should consider:
- Risks: For example, we spotted 4 warning signs for Elektro Maribor dd you should be aware, and 2 of them don’t suit us too much.
- 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!
- 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. The Simply Wall St app performs a discounted cash flow valuation for every stock on the LJSE every day. If you want to find the calculation for other stocks, search here.
Valuation is complex, but we help make it simple.
Find out if Elektro Maribor dd is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.
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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.