The intrinsic value of Equasens Société anonyme (EPA:EQS) may be 75% above the share price

Key findings

• Using the 2-step free cash flow to equity, the fair value of Equasens Société anonyme is €85.97.
• Equasens Société anonyme is estimated to be undervalued by 43% based on the current share price of €49.10
• The analysts’ price target for EQS is €70.82, 18% below our fair value estimate.

Does Equasens Société anonyme (EPA:EQS) share price in July reflect its true value? Today we will estimate the intrinsic value of the stock by taking the expected future cash flows and discounting them to their present value. This is done using the Discounted Cash Flow (DCF) model. Don’t be put off by the technical jargon, the math behind it is actually quite simple.

We generally believe that the value of a company is the present value of all the cash it will generate in the future. However, a DCF is just one valuation metric among many and is not without its flaws. For those who enjoy stock analysis, the Simply Wall St analysis model presented here might be of interest.

Check out our latest analysis for Equasens Société anonyme

The model

We use a two-stage DCF model which, as the name suggests, considers two stages of growth. The first stage is generally a period of higher growth that stabilizes towards the terminal value, which is captured in the second stage of “steady growth”. The first stage requires us to estimate the company’s cash flows for the next ten years. 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 that companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will slow their growth rate over this period. We do this to take into account that growth tends to slow more in the early years than in later years.

In general, we assume that a dollar today is worth more than a dollar in the future. Therefore, the sum of these future cash flows is discounted to today’s value:

10-year free cash flow (FCF) forecast

(“Est” = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = €490 million

After calculating the present value of future cash flows in the first 10-year period, we need to calculate the terminal value, which takes into account all future cash flows after the first period. For various reasons, a very conservative growth rate is used, which cannot exceed a country’s GDP growth. In this case, we used the 5-year average of the 10-year government bond yield (1.1%) to estimate future growth. In the same way as with the 10-year “growth” period, we discount future cash flows to today’s value, using a cost of equity of 6.4%.

Final value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = €78 million × (1 + 1.1%) ÷ (6.4% – 1.1%) = €1.5 billion

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= €1.5 billion ÷ (1 + 6.4%)¹⁰= €802 million

The total value or equity value is then the sum of the present value of future cash flows, which in this case is €1.3 billion. The final step is to divide the equity value by the number of shares outstanding. Relative to the current share price of €49.1, the company appears quite undervalued at a 43% discount to the current share price. However, valuations are imprecise instruments, much like a telescope – move a few degrees and you end up in another galaxy. Keep this in mind.

The assumptions

The key inputs to a discounted cash flow are the discount rate and, of course, the actual cash flows. If you don’t agree with these results, try the calculation yourself and play with the assumptions. The DCF also doesn’t take into account the possible cyclicality of an industry or a company’s future capital needs and therefore doesn’t provide a complete picture of a company’s potential performance. Since we consider Equasens Société anonyme 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 takes debt into account. In this calculation, we used 6.4%, which is based on a levered beta of 0.993. Beta is a measure of a stock’s volatility relative to the overall market. We get our beta from the industry average beta of globally comparable companies, with a set limit between 0.8 and 2.0, which is a reasonable range for a stable company.

SWOT analysis for Equasens Société anonyme

Go on:

Although the valuation of a company is important, ideally it should not be the only analysis you look at for a company. The DCF model is not a perfect tool for stock valuation. You should rather apply different cases and assumptions and see how they affect the valuation of the company. For example, changes in the company’s cost of equity or the risk-free interest rate can significantly affect the valuation. Why is the intrinsic value higher than the current share price? For Equasens Société anonyme, we have compiled three basic aspects for you to consider:

1. Financial health: Does EQS have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors such as debt and risk.
2. Future income: How is EQS’s growth rate compared to competitors and the overall market? Learn more about analyst consensus numbers for the coming years by using our free chart of analyst growth expectations.
3. Other high-quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality stocks to get an idea of ​​what else you might be missing out on!

PS The Simply Wall St app runs a discounted cash flow valuation for every stock in the ENXTPA every day. If you want to find the calculation for other stocks, just search here.

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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.

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