The intrinsic value of Catering International & Services Société anonyme (EPA: CTRG) is potentially 44% higher than its share price.
How far is Catering International & Services Société Anonyme (EPA: CTRG) from its intrinsic value? Using the most recent financial data, we’ll examine whether the stock’s price is fair by projecting its future cash flows and then discounting them to today’s value. One way to do this is to use the Discounted Cash Flow (DCF) model. Don’t be put off by the lingo, the math is actually pretty straightforward.
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. Anyone interested in knowing a little more about intrinsic value should read the Simply Wall St analysis model.
See our latest analysis for Catering International & Services Société Anonyme
We’re going to use a two-stage DCF model, which, as the name suggests, takes into account two growth stages. The first stage is usually a period of higher growth which stabilizes towards the terminal value, captured in the second period of “steady growth”. To begin with, we need to get cash flow estimates for 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 discount the value of those future cash flows to their estimated value in today’s dollars. hui:
10-year free cash flow (FCF) forecast
|Leverage FCF (€, Millions)||5.60 M €||€ 9.80m||€ 8.92m||€ 8.37m||€ 8.01m||7.78 M €||€ 7.64m||7.54 million euros||7.49 M €||7.46 million euros|
|Source of growth rate estimate||Analyst x1||Analyst x1||Is @ -9%||Is @ -6.19%||Is @ -4.22%||East @ -2.85%||Is @ -1.89%||Is @ -1.21%||East @ -0.74%||East @ -0.41%|
|Present value (€, Millions) discounted @ 6.0%||€ 5.3||€ 8.7||€ 7.5||€ 6.6||€ 6.0||€ 5.5||€ 5.1||€ 4.7||€ 4.4||€ 4.2|
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = 58 M €
After calculating the present value of future cash flows over the initial 10 year period, we need to calculate the terminal value, which takes into account all future cash flows beyond the first step. 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 0.4%. We discount the terminal cash flows to their present value at a cost of equity of 6.0%.
Terminal value (TV)= FCF2030 × (1 + g) ÷ (r – g) = € 7.5m × (1 + 0.4%) ÷ (6.0% – 0.4%) = € 134m
Present value of terminal value (PVTV)= TV / (1 + r)ten= 134 M € ÷ (1 + 6.0%)ten= 75 M €
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 € 133m. To get the intrinsic value per share, we divide it by the total number of shares outstanding. Compared to the current share price of € 11.8, the company appears to be fairly good value with a 30% discount to the current share price. Remember, however, that this is only a rough estimate, and like any complex formula – trash in, trash out.
Now the most important inputs to a discounted cash flow are the discount rate and, of course, the actual cash flow. 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 Catering International & Services Société Anonyme 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 into account debt. In this calculation, we used 6.0%, which is based on a leveraged beta of 1.077. Beta is a measure of the volatility of a stock relative to the market as a whole. We get our average beta from the industry beta of comparable companies globally, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
While valuing a business is important, it’s just one of the many factors you need to assess for a business. It is not possible to achieve a rock-solid valuation with a DCF model. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to undervaluation or overvaluation of the company. If a business grows at a different rate, or if its cost of equity or risk-free rate changes sharply, output can be very different. What is the reason why the stock price is below intrinsic value? For Catering International & Services Société Anonyme, we have put together three important factors to take into account:
- Risks: Concrete example, we have spotted 1 warning sign for Catering International & Services Société Anonyme you must be aware.
- Future benefits: How does CTRG’s growth rate compare to that of its peers and the broader market? Dig deeper into the analyst consensus count for years to come by interacting with our free analyst growth expectations chart.
- Other high quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality stocks to get a feel for what you might be missing!
PS. Simply Wall St updates its DCF calculation for every French stock every day, 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. It does not constitute a recommendation to buy or sell shares 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 the mentioned stocks.
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