A look at the intrinsic value of Infrastructure Wireless Italiane SpA (BIT:INW)
In this article, we will estimate the intrinsic value of Infrastructure Wireless Italiane SpA (BIT:INW) by taking expected future cash flows and discounting them to the present value. Our analysis will use the discounted cash flow (DCF) model. Don’t be put off by the jargon, the underlying calculations are actually quite simple.
Remember though that there are many ways to estimate the value of a business and a DCF is just one method. Anyone interested in learning a little more about intrinsic value should read the Simply Wall St.
Discover our latest analysis for Infrastrutture Wireless Italiane
Step by step in the calculation
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, so we need to discount the sum of these future cash flows to arrive at an estimate of present value:
Estimated free cash flow (FCF) over 10 years
2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | |
Leveraged FCF (€, Millions) | €524.5 million | €584.9 million | €598.7 million | €623.6 million | €658.3 million | €679.9 million | €699.0 million | €716.3 million | €732.4 million | €747.5 million |
Growth rate estimate Source | Analyst x6 | Analyst x6 | Analyst x4 | Analyst x3 | Analyst x3 | Is at 3.29% | Is at 2.81% | Is at 2.47% | Is at 2.24% | Is at 2.07% |
Present value (€, millions) discounted at 6.8% | 491 € | 513 € | 491 € | 479 € | 473 € | 458 € | 440 € | 422 € | 404 € | 386 € |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = €4.6 billion
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 (1.7%) 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 6.8%.
Terminal value (TV)= FCF_{2031} × (1 + g) ÷ (r – g) = €748M × (1 + 1.7%) ÷ (6.8%–1.7%) = €15B
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= €15 billion÷ ( 1 + 6.8%)^{ten}= €7.6 billion
The total value, or equity value, is then the sum of the present value of future cash flows, which in this case is 12 billion euros. The final step is to divide the equity value by the number of shares outstanding. Compared to the current share price of €10.2, 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.
The hypotheses
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 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 Infrastrutture Wireless Italiane 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 6.8%, 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.
Let’s move on :
Although a business valuation is important, it is only one of many factors you need to assess for a business. The DCF model is not a perfect stock valuation tool. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under/overvalued?” For example, if the terminal value growth rate is adjusted slightly, it can significantly change the overall result. For Infrastrutture Wireless Italiane, we have put together three relevant things you should consider:
- Risks: Take for example the ubiquitous specter of investment risk. We have identified 2 warning signs with Infrastrutture Wireless Italiane, and understanding them should be part of your investment process.
- Future earnings: How does INW’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 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!
PS. The Simply Wall St app performs a daily updated cash flow valuation for each stock on the BIT. 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.