Wolftank-Adisa Holding AG (ETR:WAH) Shares Could Be 38% Below Their Intrinsic Value Estimate

editorial-team@simplywallst.com (Simply Wall St)

Mon, May 20, 2024, 11:36 PM 5 min read

Wolftank-Adisa Holding's estimated fair value is €20.27 based on Dividend Discount Model
Current share price of €12.60 suggests Wolftank-Adisa Holding is potentially 38% undervalued
Industry average discount to fair value of 52% suggests Wolftank-Adisa Holding's peers are currently trading at a higher discount

Does the May share price for Wolftank-Adisa Holding AG (ETR:WAH) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the forecast future cash flows of the company and discounting them back to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. Don't get put off by the jargon, the math behind it is actually quite straightforward.

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 Wolftank-Adisa Holding

The Calculation

We have to calculate the value of Wolftank-Adisa Holding slightly differently to other stocks because it is a commercial services company. In this approach dividends per share (DPS) are used, as free cash flow is difficult to estimate and often not reported by analysts. Unless a company pays out the majority of its FCF as a dividend, this method will typically underestimate the value of the stock. The 'Gordon Growth Model' is used, which simply assumes that dividend payments will continue to increase at a sustainable growth rate forever. For a number of reasons a very conservative growth rate is used that cannot exceed that of a company's Gross Domestic Product (GDP). In this case we used the 5-year average of the 10-year government bond yield (0.7%). The expected dividend per share is then discounted to today's value at a cost of equity of 5.6%. Relative to the current share price of €12.6, the company appears quite undervalued at a 38% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

Value Per Share = Expected Dividend Per Share / (Discount Rate - Perpetual Growth Rate)

= €1.0 / (5.6% – 0.7%)

= €20.3

dcf — XTRA:WAH Discounted Cash Flow May 21st 2024

Important Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own assumptions. 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 Wolftank-Adisa Holding 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 5.6%, which is based on a levered beta of 0.952. 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 Wolftank-Adisa Holding

Strength

Net debt to equity ratio below 40%.

Dividend is in the top 25% of dividend payers in the market.

Weakness

Shareholders have been diluted in the past year.

Opportunity

Expected to breakeven next year.

Trading below our estimate of fair value by more than 20%.

Threat

Debt is not well covered by operating cash flow.

Next Steps:

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. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Can we work out why the company is trading at a discount to intrinsic value? For Wolftank-Adisa Holding, we've put together three essential elements you should consider:

Risks: For instance, we've identified 5 warning signs for Wolftank-Adisa Holding that you should be aware of.
Future Earnings: How does WAH'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. Simply Wall St updates its DCF calculation for every German stock every day, so if you want to find the intrinsic value of any other stock just search here.

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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.