Is there an opportunity with the 27% undervaluation of public limited company M.video (MCX: MVID)?
Today we’re going to go over one way to estimate the intrinsic value of public joint-stock company M.video (MCX: MVID) by taking the company’s future cash flow forecasts and discounting them to the today’s value. Our analysis will use the discounted cash flow (DCF) model. There really isn’t much to do, although it might seem quite complex.
There are many ways that businesses can be assessed, so we would like to point out that a DCF is not perfect for all situations. If you still have burning questions about this type of valuation, take a look at the Simply Wall St.
See our latest review for M.video
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) estimate
2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | |
Leverage FCF (RUB, Millions) | ₽11.1b | ₽13.6b | ₽13.4b | ₽21.3b | ₽22.1b | ₽23.0b | ₽24.3b | 25.7b | ₽27.3b | ₽29.1b |
Source of estimated growth rate | Analyst x3 | Analyst x3 | Analyst x2 | Analyst x1 | Analyst x1 | East @ 4.42% | East @ 5.29% | Is 5.9% | Est @ 6.32% | Est @ 6.62% |
Present value (RUB, millions) discounted at 20% | ₽9.3k | ₽9.5k | ₽7.8k | 10.4k | ₽8.9k | ₽7.8k | ₽6.9k | 6.1k | ₽5.4k | ₽4.8k |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = 77b
We now need to calculate the Terminal Value, which takes into account all future cash flows after this ten year period. 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 20%.
Terminal value (TV)= FCF_{2031} × (1 + g) ÷ (r – g) = 29b × (1 + 7.3%) ÷ (20% – 7.3%) = ₽251b
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= ₽251b ÷ (1 + 20%)^{ten}= ₽41b
The total value is the sum of the cash flows for the next ten years plus the present terminal value, which gives the total value of equity, which in this case is ₽118b. The last step is then to divide the equity value by the number of shares outstanding. From the current share price of 485, the company appears to be slightly undervalued at a 27% discount from the current share price. Remember, however, that this is only a rough estimate, and like any complex formula – trash in, trash out.
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 M.video to be 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 20%, which is based on a leveraged beta of 2,000. 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.
Move on :
While important, calculating DCF ideally won’t be the only piece of analysis you’ll look at for a business. DCF models are not the ultimate solution for investment valuation. 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 dramatically change the overall result. Can we understand why the company trades at a discount to its intrinsic value? For M.video, we have compiled three additional factors for you to evaluate:
- Risks: For example, we have identified 4 warning signs for M.video (2 don’t sit too well with us) you should be aware.
- Future benefits: How does MVID’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.
- Other strong companies: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid trading fundamentals to see if there are other companies you may not have considered!
PS. The Simply Wall St app performs a daily discounted cash flow assessment for each MISX share. If you want to find the calculation for other actions, 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 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.