Atlantica Sustainable Infrastructure plc (NASDAQ:AY) Shares Could Be 35% Below Their Intrinsic Value Estimate

editorial-team@simplywallst.com (Simply Wall St)

Sun, Mar 17, 2024, 8:28 AM 4 min read

Key Insights

The projected fair value for Atlantica Sustainable Infrastructure is US$27.13 based on Dividend Discount Model
Atlantica Sustainable Infrastructure's US$17.58 share price signals that it might be 35% undervalued
Analyst price target for AY is US$22.95 which is 15% below our fair value estimate

Does the March share price for Atlantica Sustainable Infrastructure plc (NASDAQ:AY) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the expected future cash flows and discounting them to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

See our latest analysis for Atlantica Sustainable Infrastructure

The Model

We have to calculate the value of Atlantica Sustainable Infrastructure slightly differently to other stocks because it is a renewable energy company. Instead of using free cash flows, which are hard to estimate and often not reported by analysts in this industry, dividends per share (DPS) payments are used. This often underestimates the value of a stock, but it can still be good as a comparison to competitors. The 'Gordon Growth Model' is used, which simply assumes that dividend payments will continue to increase at a sustainable growth rate forever. The dividend is expected to grow at an annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.3%. We then discount this figure to today's value at a cost of equity of 7.1%. Compared to the current share price of US$17.6, the company appears quite undervalued at a 35% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

Value Per Share = Expected Dividend Per Share / (Discount Rate - Perpetual Growth Rate)

= US$1.8 / (7.1% – 2.3%)

= US$27.1

dcf — NasdaqGS:AY Discounted Cash Flow March 17th 2024

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Atlantica Sustainable Infrastructure 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 accounts for debt. In this calculation we've used 7.1%, which is based on a levered beta of 0.878. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

SWOT Analysis for Atlantica Sustainable Infrastructure

Strength

Dividend is in the top 25% of dividend payers in the market.

Weakness

Interest payments on debt are not well covered.

Opportunity

Annual earnings are forecast to grow faster than the American market.

Trading below our estimate of fair value by more than 20%.

Threat

Debt is not well covered by operating cash flow.

Dividends are not covered by earnings.

Annual revenue is forecast to grow slower than the American market.

Looking Ahead:

Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. What is the reason for the share price sitting below the intrinsic value? For Atlantica Sustainable Infrastructure, there are three essential factors you should explore:

Risks: Every company has them, and we've spotted 3 warning signs for Atlantica Sustainable Infrastructure (of which 1 doesn't sit too well with us!) you should know about.
Future Earnings: How does AY's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock just search here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.