How far is TenderHut SA (WSE:THG) from its intrinsic value? Using the most recent financial data, we will examine whether the stock price is fair by taking expected future cash flows and discounting them to their present value. This will be done using the discounted cash flow (DCF) model. Don’t be put off by the jargon, the underlying calculations are actually quite simple.
We draw your attention to the fact that there are many ways to value a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. Anyone interested in learning a little more about intrinsic value should read the Simply Wall St.
See our latest analysis for TenderHut
Is TenderHut correctly valued?
We use what is called a 2-step 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.
Generally, we assume that a dollar today is worth more than a dollar in the future, and so the sum of these future cash flows is then discounted to today’s value:
Estimated free cash flow (FCF) over 10 years
2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | |
Leveraged FCF (PLN, Millions) | zł2.52m | 5.14 million zł | 6.42 million zł | 7.38 zł | zł8.21m | 8.92 zł | 9.52 zł | zł10.0m | 10.5 million zł | 10.9 million zł |
Growth rate estimate Source | Analyst x1 | Analyst x1 | Analyst x1 | Is at 14.97% | Is at 11.22% | Is at 8.6% | Is at 6.76% | Is at 5.47% | Is at 4.57% | Is at 3.94% |
Present value (PLN, millions) discounted at 7.7% | 2.3 zł | 4.4 zł | 5.1 zł | 5.5 zł | 5.7 zł | 5.7 zł | 5.7 zł | 5.5 zł | 5.4 zł | 5.2 zł |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = zł50m
We now need to calculate the terminal value, which represents all future cash flows after this ten-year period. 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 7.7%.
Terminal value (TV)= FCF_{2031} × (1 + g) ÷ (r – g) = zł11m × (1 + 2.5%) ÷ (7.7%– 2.5%) = zł213m
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= zł213m÷ ( 1 + 7.7%)^{ten}= zł101m
The total value, or equity value, is then the sum of the present value of future cash flows, which in this case is 151 million zł. The final step is to divide the equity value by the number of shares outstanding. Compared to the current share price of 73.0 zł, the company appears approximately at fair value at a 3.0% discount to the current share price. The assumptions of any calculation have a big impact on the valuation, so it’s best to consider this as a rough estimate, not accurate down to the last penny.
The hypotheses
The above calculation is highly dependent on two assumptions. One is the discount rate and the other is the 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 view TenderHut 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 7.7%, which is based on a leveraged beta of 1.035. 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.
Look forward:
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, changes in the company’s cost of equity or the risk-free rate can have a significant impact on the valuation. For TenderHut, there are three other factors you need to evaluate:
- Risks: For example, we discovered 3 warning signs for TenderHut which you should be aware of before investing here.
- Future earnings: How does THG’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. 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.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
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.