I am going to run you through how I calculated the intrinsic value of Focus Home Interactive Société anonyme (ENXTPA:ALFOC) using the discounted cash flow (DCF) method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Also note that this article was written in May 2018 so be sure check the latest calculation for Focus Home Interactive Société anonyme here.
Crunching the numbers
I use what is known as the 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the initial phase has higher growth rates that plateau over time. To begin, I took the analyst consensus forecast of ALFOC’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity of 8.18%. When estimates weren’t available, I’ve extrapolated the average annual growth rate over the previous five years, capped at a reasonable level. This resulted in a present value of 5-year cash flow of €36.47M. Keen to understand how I calculated this value? Check out our detailed analysis here.
In the visual above, we see how how ALFOC’s top and bottom lines are expected to move in the future, which should give you an idea of ALFOC’s outlook. Next, I calculate the terminal value, which is the business’s cash flow after the first stage. I’ve decided to use the 10-year government bond rate of 2.8% as the perpetual growth rate, which is rightly below GDP growth, but more towards the conservative side. The present value of the terminal value after discounting it back five years is €129.63M.
The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is €166.10M. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of €31.77, which, compared to the current share price of €31.2, we find that Focus Home Interactive Société anonyme is about right, perhaps slightly undervalued at a 1.81% discount to what it is available for right now.
Next Steps:
Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company.
For ALFOC, I’ve put together three key factors you should further examine:
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Financial Health: Does ALFOC have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
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Future Earnings: How does ALFOC’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.
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Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of ALFOC? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!