The intrinsic value of Ebusco Holding NV (AMS:EBUS) may be 75% above the share price

Key findings

• Using the 2-step free cash flow to equity, the estimated fair value of Ebusco Holding is €2.91.
• Ebusco Holding is estimated to be undervalued by 43% at a current share price of €1.66
• Our fair value estimate is 52% below Ebusco Holding’s analyst price target of €6.03.

Today we will run through a simple valuation method that estimates the attractiveness of Ebusco Holding NV (AMS:EBUS) as an investment opportunity by projecting its future cash flows and then discounting them to today’s value. One way to do this is by applying the Discounted Cash Flow (DCF) model. There is actually not too much involved in it, even though it may seem quite complex.

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 it is not without its flaws. If you want to learn more about discounted cash flow, you can read the reasoning behind this calculation in detail in Simply Wall St’s analysis model.

Check out our latest analysis for Ebusco Holding

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, we need to discount the sum of these future cash flows to arrive at an estimate of present value:

Estimation of free cash flow (FCF) over 10 years

(“Est” = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = 18 million €

We now need to calculate the terminal value that takes into account all future cash flows after this ten-year period. For various reasons, a very conservative growth rate is used that cannot exceed a country’s GDP growth. In this case, we used the 5-year average of the 10-year government bond yield (0.9%) 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)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = €18 million × (1 + 0.9%) ÷ (6.4% – 0.9%) = €335 million

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= €335 million ÷ (1 + 6.4%)¹⁰= €180 million

The total value or equity value is then the sum of the present value of future cash flows, which in this case is €198 million. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of €1.7, the company appears quite undervalued at a 43% discount to the current share price. The assumptions in any calculation have a big impact on the valuation, so it is better to consider this as a rough estimate that is not accurate to the last cent.

Important assumptions

We would like to point out that the key inputs to a discounted cash flow are the discount rate and of course the actual cash flows. Part of investing is making your own assessment of a company’s future performance, so try the calculation yourself and check your own assumptions. DCF also does not take into account the possible cyclicality of an industry or a company’s future capital needs and therefore does not provide a complete picture of a company’s potential performance. Since we consider Ebusco 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 takes debt into account. In this calculation, we used 6.4%, which is based on a leveraged beta of 1.207. Beta is a measure of a stock’s volatility relative to the market as a whole. 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 Ebusco Holding

Next Steps:

While the DCF calculation is important, it is only one of many factors you need to evaluate a company. DCF models are not the be-all and end-all of investment valuation. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to an undervaluation or overvaluation of the company. For example, changes in the company’s cost of equity or risk-free interest rate can significantly affect the valuation. Can we find out why the company is trading at a discount to intrinsic value? For Ebusco Holding, we have compiled three key points for you to consider:

1. Risks: For example, we found 3 warning signals for Ebusco Holding (1 makes us a little uncomfortable) you should know.
2. Future income: How is EBUS’ 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 solid companies: Low debt, high returns on equity, and good past performance are the foundation of a strong company. Check out our interactive list of stocks with solid business fundamentals to see if there are any other companies you may not have considered!

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

Do you have feedback on this article? Are you concerned about the content? Get in touch directly from us. Alternatively, send an email to editorial-team (at) simplywallst.com.

This Simply Wall St article is of a general nature. We comment based solely on 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.

Do you have feedback on this article? Are you interested in the content? Contact us directly. Alternatively, send an email to [email protected]