A look at the intrinsic value of LiveChat Software SA (WSE:LVC)
Does the February stock price for LiveChat Software SA (WSE:LVC) reflect what it’s really worth? Today we are going to estimate the intrinsic value of the stock by estimating the future cash flows of the company and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model for this purpose. Don’t be put off by the jargon, the underlying calculations are actually quite simple.
We generally believe that the value of a company is the present value of all the cash it will generate in the future. However, a DCF is just one of many evaluation metrics, and it is not without its flaws. Anyone interested in learning a little more about intrinsic value should read the Simply Wall St.
Check out our latest analysis for LiveChat software
crush numbers
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 start, we need to estimate the cash flows 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.
A DCF is based on the idea that a dollar in the future is worth less than a dollar today, and so the sum of these future cash flows is then discounted to today’s value:
10-Year Free Cash Flow (FCF) Forecast
2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | |
Leveraged FCF (PLN, Millions) | 110.0 million zł | 126.0 million zł | 139.0 million zł | 146.8 million zł | 153.7 million zł | 159.8 million zł | 165.5 million zł | 170.8 million zł | 175.9 million zł | 180.9 million zł |
Growth rate estimate Source | Analyst x1 | Analyst x1 | Analyst x1 | Is at 5.61% | Is at 4.67% | Is at 4.01% | Is at 3.55% | Is at 3.22% | Is @ 3% | Is at 2.84% |
Present value (PLN, millions) discounted at 7.5% | 102 zł | 109 zł | 112 zł | 110 zł | 107 zł | 103 zł | 99.7 zł | 95.7 zł | 91.7 zł | 87.7 zł |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = zł1.0b
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 (2.5%) 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 7.5%.
Terminal value (TV)= FCF_{2031} × (1 + g) ÷ (r – g) = zł181m× (1 + 2.5%) ÷ (7.5%– 2.5%) = zł3.7b
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= zł3.7b÷ ( 1 + 7.5%)^{ten}= zł1.8b
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 2.8 billion zł. To get the intrinsic value per share, we divide it by the total number of shares outstanding. Compared to the current share price of 97.6 zł, the company appears approximately at fair value at a 10% discount to the current share price. Remember though that this is only a rough estimate, and like any complex formula – trash in, trash out.
The hypotheses
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 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 view LiveChat Software 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 factors in debt. In this calculation, we used 7.5%, which is based on a leveraged beta of 0.993. 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 a business valuation is important, it shouldn’t be the only metric to consider when researching a business. It is not possible to obtain an infallible valuation with a DCF model. Preferably, you would apply different cases and assumptions and see their impact on the valuation of the business. For example, changes in the company’s cost of equity or the risk-free rate can have a significant impact on the valuation. For LiveChat software, there are three essential factors you should dig into:
- Risks: For example, we have identified 2 Warning Signs for LiveChat Software of which you should be aware.
- Future earnings: How does LVC’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. Simply Wall St updates its DCF calculation for every Polish stock daily, so if you want to find the intrinsic value of any other stock, just 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.