A look at the intrinsic value of Cyfrowe Centrum Serwisowe Spólka Akcyjna (WSE: CCS)

Today we’re going to review one way to estimate the intrinsic value of Cyfrowe Centrum Serwisowe Spólka Akcyjna (WSE: CCS) by estimating the company’s future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. It may sound complicated, but it’s actually quite simple!

Keep in mind, however, that there are many ways to estimate the value of a business and that a DCF is just one method. For those who are passionate about equity analysis, the Simply Wall St analysis template here may be something that interests you.

See our latest review for Cyfrowe Centrum Serwisowe Spólka Akcyjna

What is the estimated valuation?

We have to calculate the value of Cyfrowe Centrum Serwisowe Spólka Akcyjna slightly differently from other stocks because it is a specialist retail company. Instead of using free cash flow, which is difficult to estimate and often unreported by industry analysts, dividend payments per share (DPS) are used. Unless a company pays out the majority of its FCF as a dividend, this method will generally underestimate the value of the stock. The “Gordon Growth Model” is used, which simply assumes that dividend payments will continue to increase at a sustainable growth rate forever. For a number of reasons, a very conservative growth rate is used that 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 (2.6%). The expected dividend per share is then discounted to its current value at a cost of equity of 11%. Compared to the current stock price of 1.8z, the company appears to be around fair value at the time of writing. The assumptions in any calculation have a big impact on the valuation, so it’s best to take this as a rough estimate, not precise down to the last penny.

Value per share = Expected dividend per share / (Discount rate – Perpetual growth rate)

= zł0.1 / (11% – 2.6%)

= zł1.6

The hypotheses

Now the most important inputs to a discounted cash flow are the discount rate and, of course, the actual cash flow. If you don’t agree with these results, try the calculation yourself and play with the 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 Cyfrowe Centrum Serwisowe Spólka Akcyjna 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 the debt. In this calculation, we used 11%, which is based on a leveraged beta of 1.558. 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.

Next steps:

While a business valuation is important, ideally it won’t be the only analysis you review for a business. The DCF model is not a perfect equity valuation tool. 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 valuation. For Cyfrowe Centrum Serwisowe Spólka Akcyjna, we have put together three important things you should consider:

1. Risks: Every company has them, and we have spotted 3 warning signs for Cyfrowe Centrum Serwisowe Spólka Akcyjna (2 of which make us uncomfortable!) to know.
2. 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!
3. Other environmentally friendly companies: Are you concerned about the environment and think that consumers will buy more and more environmentally friendly products? Browse our interactive list of companies thinking about a greener future to discover stocks you may not have thought of!

PS. The Simply Wall St app performs a daily discounted cash flow assessment for each WSE share. If you want to find the calculation for other actions, do a 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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