Calculating the intrinsic value of Enagás, SA (BME:ENG)

Key findings

• The forecast fair value for Enagás is €17.78 based on the dividend discount model
• Enagás’ share price of €14.53 is at a similar level to the estimated fair value
• The analysts’ price target for ENG is €16.03, 9.8% below our fair value estimate.

In this article, we will estimate the intrinsic value of Enagás, SA (BME:ENG) by taking the expected future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will use to do this. Don’t be put off by the technical jargon, the math behind it is actually quite simple.

However, keep in mind that there are many ways to estimate the value of a company, and a DCF is just one of them. For those who enjoy stock analysis, the analysis model presented here by Simply Wall St might be of interest.

Check out our latest analysis for Enagás

The calculation

Because Enagás operates in the gas utilities sector, 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 not reported by analysts. This often underestimates a stock’s value, but it can still be a good comparison to competitors. We use the Gordon Growth Model, which assumes the dividend grows at a sustainable rate over time. The dividend is expected to grow at an annual growth rate equal to the 5-year average 10-year Treasury yield of 1.5%. We then discount this figure to today’s value at a cost of equity of 7.1%. Compared to the current share price of €14.5, the company seems roughly fairly valued at an 18% discount to the current share price. However, keep in mind that this is only an approximate valuation and as with any complex formula, where there’s garbage in, there’s garbage out.

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

= 1.0€ / (7.1% – 1.5%)

= 17,8 €

The assumptions

The main inputs to a discounted cash flow are the discount rate and of course the actual cash flows. You don’t have to agree with these inputs, I recommend repeating the calculations yourself and playing around with them. The DCF also doesn’t take into account the possible cyclicality of an industry or a company’s future capital needs, so it doesn’t give a complete picture of a company’s potential performance. Since we consider Enagás 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 7.1%, which is based on a leveraged beta of 0.800. 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 Enagás

Next Steps:

While a company’s valuation is important, it shouldn’t be the only metric you consider when researching a company. The DCF model isn’t a perfect stock valuation tool. It should be viewed more as a guide to “what assumptions need to hold for this stock to be under/overvalued.” If a company grows at a different rate, or if its cost of equity or risk-free rate changes significantly, the outcome may look very different. For Enagás, we’ve compiled three other aspects you should investigate further:

1. Risks: Every company has them, and we have found 3 warning signs for Enagás You should know about this.
2. Future income: How does ENG’s growth rate compare to its 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. Simply Wall St updates its DCF calculation for each Spanish stock daily, so if you want to find out the intrinsic value of another stock, just search here.

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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.

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