secunet Security Networks Aktiengesellschaft (ETR:YSN) Shares Could Be 34% Above Their Intrinsic Value Estimate

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Key Insights

Today we will run through one way of estimating the intrinsic value of secunet Security Networks Aktiengesellschaft (ETR:YSN) 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. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

Check out our latest analysis for secunet Security Networks

The Method

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. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or 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

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

Levered FCF (€, Millions)

€41.4m

€42.3m

€43.1m

€37.5m

€36.8m

€36.5m

€36.3m

€36.3m

€36.3m

€36.4m

Growth Rate Estimate Source

Analyst x3

Analyst x4

Analyst x4

Analyst x1

Est @ -1.68%

Est @ -0.97%

Est @ -0.48%

Est @ -0.13%

Est @ 0.11%

Est @ 0.28%

Present Value (€, Millions) Discounted @ 5.6%

€39.2

€37.9

€36.6

€30.1

€28.0

€26.3

€24.7

€23.4

€22.2

€21.1

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = €289m

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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 0.7%. We discount the terminal cash flows to today's value at a cost of equity of 5.6%.