Calculating The Fair Value Of EPIC Suisse AG (VTX:EPIC)
editorial-team@simplywallst.com (Simply Wall St)
6 min read
Key Insights
EPIC Suisse's estimated fair value is CHF70.52 based on 2 Stage Free Cash Flow to Equity
With CHF64.00 share price, EPIC Suisse appears to be trading close to its estimated fair value
Peers of EPIC Suisse are currently trading on average at a 111% premium
Today we will run through one way of estimating the intrinsic value of EPIC Suisse AG (VTX:EPIC) by taking the forecast future cash flows of the company and discounting them back to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. In the first stage we need to estimate the cash flows to the business over the next ten years. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) forecast
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
Levered FCF (CHF, Millions)
CHF50.0m
CHF52.3m
CHF54.0m
CHF55.2m
CHF56.1m
CHF56.7m
CHF57.2m
CHF57.5m
CHF57.8m
CHF58.0m
Growth Rate Estimate Source
Est @ 6.47%
Est @ 4.55%
Est @ 3.21%
Est @ 2.27%
Est @ 1.61%
Est @ 1.15%
Est @ 0.83%
Est @ 0.61%
Est @ 0.45%
Est @ 0.34%
Present Value (CHF, Millions) Discounted @ 7.8%
CHF46.4
CHF45.0
CHF43.1
CHF40.9
CHF38.6
CHF36.2
CHF33.8
CHF31.6
CHF29.4
CHF27.4
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = CHF372m
We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (0.08%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 7.8%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CHF753m÷ ( 1 + 7.8%)10= CHF356m
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is CHF728m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of CHF64.0, the company appears about fair value at a 9.2% 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.
SWX:EPIC Discounted Cash Flow November 13th 2023
Important Assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 EPIC Suisse 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 7.8%, which is based on a levered beta of 1.541. 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 EPIC Suisse
Strength
Debt is well covered by earnings.
Dividend is in the top 25% of dividend payers in the market.
Weakness
Earnings declined over the past year.
Opportunity
Current share price is below our estimate of fair value.
Threat
Debt is not well covered by operating cash flow.
Dividends are not covered by earnings.
Looking Ahead:
Although the valuation of a company is important, it is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For EPIC Suisse, there are three fundamental items you should further examine:
Risks: For example, we've discovered 4 warning signs for EPIC Suisse (1 doesn't sit too well with us!) that you should be aware of before investing here.
Future Earnings: How does EPIC'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 Solid Businesses: 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 business fundamentals to see if there are other companies you may not have considered!
PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the SWX every day. If you want to find the calculation for other stocks just search here.
Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
