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Estimating The Intrinsic Value Of DEFAMA Deutsche Fachmarkt AG (ETR:DEF)

In This Article:

Key Insights

  • Using the 2 Stage Free Cash Flow to Equity, DEFAMA Deutsche Fachmarkt fair value estimate is €33.17

  • With €28.40 share price, DEFAMA Deutsche Fachmarkt appears to be trading close to its estimated fair value

  • Peers of DEFAMA Deutsche Fachmarkt are currently trading on average at a 51% premium

In this article we are going to estimate the intrinsic value of DEFAMA Deutsche Fachmarkt AG (ETR:DEF) by projecting its future cash flows and then discounting them to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!

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 DEFAMA Deutsche Fachmarkt

What's The Estimated Valuation?

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To start off with, we need to estimate the next ten years of cash flows. 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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, 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

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

Levered FCF (€, Millions)

€12.8m

€12.7m

€12.7m

€12.8m

€12.9m

€13.0m

€13.1m

€13.2m

€13.3m

€13.5m

Growth Rate Estimate Source

Est @ -1.02%

Est @ -0.39%

Est @ 0.06%

Est @ 0.37%

Est @ 0.58%

Est @ 0.74%

Est @ 0.84%

Est @ 0.92%

Est @ 0.97%

Est @ 1.00%

Present Value (€, Millions) Discounted @ 8.8%

€11.8

€10.8

€9.9

€9.1

€8.4

€7.8

€7.2

€6.7

€6.2

€5.8

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = €84m

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 1.1%. We discount the terminal cash flows to today's value at a cost of equity of 8.8%.