Calculation of the fair value of Infrastrutture Wireless Italiane SpA (BIT:INW)

Key findings

• The estimated fair value of Infrastrutture Wireless Italiane is €11.03 based on the 2-step Free Cash Flow to Equity
• The current share price of €10.26 suggests that Infrastrutture Wireless Italiane may be trading close to its fair value
• The analysts’ price target for INW is €12.74, 15% above our fair value estimate.

Today we will go through one way to estimate the intrinsic value of Infrastrutture Wireless Italiane SpA (BIT:INW) by taking the expected future cash flows and discounting them to today’s value. Our analysis will use the Discounted Cash Flow (DCF) model. This may sound complicated, but it’s actually quite simple!

We would like to point out that there are many ways to value a company and that each method, such as the DCF, has advantages and disadvantages in certain scenarios. For those who like to engage in stock analysis, the analysis model presented here by Simply Wall St might be of interest.

Check out our latest analysis for Infrastrutture Wireless Italiane

The method

We use what is called a 2-stage model, which simply means that we have two different growth periods for the company’s cash flows. Generally speaking, the first stage is one of higher growth, and the second stage is one of lower 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:

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) = 4.5 billion euros

After calculating the present value of future cash flows in the first 10-year period, we need to calculate the terminal value that takes into account all future cash flows after the first period. The Gordon growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average of the 10-year Treasury yield of 2.3%. We discount the terminal cash flows to today’s value at a cost of equity of 8.6%.

Final value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = €811 million × (1 + 2.3%) ÷ (8.6% – 2.3%) = €13 billion

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= €13 billion ÷ (1 + 8.6%)¹⁰= 5.8 billion euros

The total value is the sum of the cash flows over the next ten years plus the discounted terminal value, which gives the total value of equity, which in this case is €10 billion. In the final step, we divide the equity value by the number of shares outstanding. Relative to the current share price of €10.3, the company appears to be roughly fairly valued at a discount of 7.0% to the current share price. However, keep in mind that this is only an approximate valuation and as with any complex formula, where there is garbage in, there is garbage out.

Important 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 and therefore doesn’t provide a complete picture of a company’s potential performance. Since we consider Infrastrutture Wireless Italiane 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 8.6%, 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 an imposed limit of between 0.8 and 2.0, which is a reasonable range for a stable company.

SWOT Analysis for Infrastrutture Wireless Italiane

Next Steps:

Valuation is only one side of the coin when building your investment thesis and ideally should not be the only analysis you examine for a company. The DCF model is not a perfect stock valuation tool. It should be viewed more as a guide to “what assumptions must 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 Infrastrutture Wireless Italiane, there are three relevant elements you should examine more closely:

1. Risks: Note that Infrastrutture Wireless Italiane shows 2 warning signals in our investment analysis you should know about…
2. Future income: How is INW’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. Simply Wall St updates its DCF calculation for each Italian 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 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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