A look at the fair value of 7C Solarparken AG (ETR:HRPK)

Key findings

• The estimated fair value of 7C Solarparken is €2.38 based on the dividend discount model

• With a share price of €2.76, 7C Solarparken appears to be trading close to its estimated fair value

• The industry average of 6,383% suggests that 7C Solarparken’s competitors are currently trading at a higher premium to fair value

Today we’re going to go through one way to estimate the intrinsic value of 7C Solarparken AG (ETR:HRPK) by taking the expected future cash flows and discounting them to today’s value. We’re going to use the Discounted Cash Flow (DCF) model on this occasion. Believe it or not, it’s not too difficult to follow, as you’ll see from our example!

We would like to point out that there are many ways to value a company and that each method, like the DCF, has advantages and disadvantages in certain scenarios. If you still have questions about this type of valuation, take a look at Simply Wall St’s analysis model.

Read our latest analysis for 7C Solarparken

Processing the numbers

Because 7C Solarparken is in the renewable energy space, we need to calculate intrinsic value a little differently. This approach uses dividends per share (DPS) because free cash flow is difficult to estimate and often unreported by analysts. Unless a company pays out the majority of its free cash flow as dividends, this method will typically underestimate the value of the stock. We use the Gordon Growth Model, which assumes that the dividend will grow at a sustainable rate over time. For a number of reasons, a very conservative growth rate is used, which 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 using a cost of equity of 5.0%. Relative to the current share price of €2.8, the company seems about fair at the time of writing. However, remember that this is only an approximate assessment and as with any complex formula, where garbage goes in, garbage comes out.

The story goes on

Value per share = Expected dividend per share / (Discount rate – Perpetual growth rate)

= 0.1€ / (5.0% – 0.7%)

= 2.4€

Important assumptions

We would like to point out that the main inputs for a discounted cash flow are the discount rate and of course the actual cash flows. You do not have to agree with these inputs, I recommend repeating the calculations yourself and playing around with them. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company and therefore does not provide a complete picture of a company’s potential performance. Since we consider 7C Solarparken as potential shareholders, the cost of equity is used as the discount rate and not the cost of capital (or weighted average cost of capital, WACC) which takes debt into account. In this calculation, we used 5.0%, which is based on a leveraged beta of 0.932. Beta is a measure of a stock’s volatility compared to the overall market. 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 company.

SWOT analysis for 7C Solarparken

Strength

weakness

Opportunity

Danger

Next Steps:

Although valuing 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 company’s valuation. For example, changes in the company’s cost of equity or risk-free interest rate can significantly affect the valuation. For 7C Solarparken, there are three key factors you should evaluate:

1. Risks: For example, we discovered 3 warning signals for 7C Solarparken that you should know before investing here.

2. Future income: How is HRPK’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 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 XTRA 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 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]