An Intrinsic Calculation For bpost SA/NV (EBR:BPOST) Shows It’s 26.41% Undervalued

Simply Wall St.

Wed, Oct 10, 2018, 1:02 AM

Today I will be providing a simple run through of a valuation method used to estimate the attractiveness of bpost SA/NV (EBR:BPOST) as an investment opportunity by projecting its future cash flows and then discounting them to today’s value. This is done using the discounted cash flows (DCF) model. It may sound complicated, but actually it is quite simple! Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Please also note that this article was written in October 2018 so be sure check out the updated calculation by following the link below.

Check out our latest analysis for bpost

What’s the value?

I’m 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 perpetual stable growth rate. To begin with we have to get estimates of the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount the sum of these cash flows to arrive at a present value estimate.

5-year cash flow forecast

	2019	2020	2021	2022	2023
Levered FCF (€, Millions)	€253.81	€277.91	€295.35	€307.30	€322.95
Source	Analyst x5	Analyst x6	Analyst x4	Analyst x4	Est @ 5.09%
Present Value Discounted @ 9.44%	€231.92	€232.04	€225.33	€214.23	€205.72

Present Value of 5-year Cash Flow (PVCF)= €1.1b

The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of the GDP. In this case I have used the 10-year government bond rate (0.9%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 9.4%.

Terminal Value (TV) = FCF₂₀₂₂ × (1 + g) ÷ (r – g) = €323m × (1 + 0.9%) ÷ (9.4% – 0.9%) = €3.8b

Present Value of Terminal Value (PVTV) = TV / (1 + r)⁵ = €3.8b ÷ ( 1 + 9.4%)⁵ = €2.4b

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is €3.5b. The last step is to then divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) then we use the equivalent number. This results in an intrinsic value of €17.75. Relative to the current share price of €13.06, the stock is about right, perhaps slightly undervalued at a 26% discount to what it is available for right now.

ENXTBR:BPOST Intrinsic Value Export October 10th 18

The assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. You don’t have to agree with my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at bpost as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 9.4%, which is based on a levered beta of 0.938. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Next Steps:

Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For BPOST, I’ve compiled three pertinent aspects you should further examine:

Financial Health: Does BPOST 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.
Future Earnings: How does BPOST’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: Are there other high quality stocks you could be holding instead of BPOST? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. The Simply Wall St app conducts a discounted cash flow for every stock on the EBR every 6 hours. If you want to find the calculation for other stocks just search here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

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