key insights
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Using two-stage free cash flow to equity, ACCENTRO Real Estate has a fair value estimate of €2.95.
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ACCENTRO Real Estate’s share price of €1.56 indicates the company may be undervalued by 47%
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Our fair value estimate is 3.9% below ACCENTRO Real Estate’s analyst price target of €3.08.
Today we will briefly explain the valuation methodology used to estimate the attractiveness of ACCENTRO Real Estate AG (ETR:A4Y) as an investment opportunity. This is done by taking the expected future cash flows and discounting them to their present value. Here we use a discounted cash flow (DCF) model. It may seem very complicated, but it’s actually not that much.
However, keep in mind that there are many ways to estimate a company’s value, and a DCF is just one method. If you still have doubts about this type of valuation, take a look at the Simply Wall St analysis model.
Check out our latest analysis for ACCENTRO Real Estate.
calculate numbers
We use a two-stage growth model. This means considering his two stages of company growth. In the initial stage, a company may have a higher growth rate, and in the second stage, it is usually considered to have a stable growth rate. First, you need to obtain an estimate of your cash flows for the next 10 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 see their rate of contraction slow, and companies with growing free cash flow will see their growth rate slow over this period. This is to reflect that growth tends to be slower in the early years than in later years.
A DCF is based on the idea that a dollar in the future will be worth less than a dollar today. Therefore, we discount the value of these future cash flows to their estimated value in today’s dollars.
Estimated 10-year free cash flow (FCF)
2024 |
2025 |
2026 |
2027 |
2028 |
2029 |
2030 |
2031 |
2032 |
2033 |
|
Leveraged FCF (Euro, million) |
51.7 million euros |
27.6 million euros |
1.7 million euros |
10.5 million euros |
5.7 million euros |
3.89 million euros |
3.02 million euros |
2.56 million euros |
2.28 million euros |
2.11 million euros |
Growth rate estimation source |
Analyst x 1 |
Analyst x 1 |
Analyst x 1 |
Analyst x 1 |
Estimated @ -45.67% |
Estimated @ -31.87% |
Estimated @ -22.20% |
Estimated @ -15.44% |
Estimated @ -10.70% |
Forecast @ -7.39% |
Present value (in euros, million) discounted at 10% |
46.9 euros |
22.7 euros |
1.3 euro |
7.1 euro |
3.5 euros |
2.2 euros |
1.5 euro |
1.2 euro |
0.9 euro |
0.8 euro |
(“Est” = FCF growth rate estimated by Simply Wall St)
Present value of cash flows over 10 years (PVCF) = 88 million euros
Next, you need to calculate the terminal value, which takes into account all future cash flows over this 10-year period. The Gordon Growth formula is used to calculate the terminal value at a future annual growth rate equal to his five-year average of 0.4% on the 10-year Treasury yield. The final cash flows are discounted to today’s value at a cost of capital of 10%.
Terminal value (TV)=FCF2033 × (1 + g) ÷ (r – g) = 2.1 million euros × (1 + 0.4%) ÷ (10% – 0.4%) = 21 million euros
Present Value of Terminal Value (PVTV)= TV / (1 + r)Ten= 21 million euros ÷ ( 1 + 10%)Ten= 7.9 million euros
The total value, or capital value, is the sum of the present values of the future cash flows, which in this case is €96 million. The final step is to divide the stock value by the number of shares outstanding. Compared to the current share price of €1.6, the company appears to be significantly undervalued, at a 47% discount to its current share price. However, evaluation is an imprecise measure and is more like a telescope. After moving a few degrees, you will eventually reach another galaxy. Please keep this in mind.
Important prerequisites
It is important to point out that the most important input to discounted cash flows is the discount rate, which is, of course, the actual cash flows. You are not required to agree to these inputs. I encourage you to redo the calculations yourself and give it a try. Additionally, DCF does not give a complete picture of a company’s potential performance because it does not take into account the cyclicality of the industry or the company’s future capital requirements. Given that we are considering ACCENTRO Real Estate as a potential shareholder, the cost of equity is used as the discount rate, rather than the cost of equity taking into account debt (or weighted average cost of capital, WACC). For this calculation, we used 10% based on a leverage beta of 2.000. Beta is a measure of a stock’s volatility compared to the market as a whole. Beta values are derived from industry average beta values for globally comparable companies, with a limit of 0.8 to 2.0, which is a reasonable range for stable businesses.
SWOT analysis of ACCENTRO Real Estate
strength
Weakness
opportunity
threat
For the future:
Valuation of a company is important, but it is only one of many factors that should be used to evaluate a company. The DCF model is not a perfect stock valuation tool. Rather, it should be viewed as a guide to “What assumptions need to hold true for this stock to be undervalued/overvalued?” Outcomes can vary widely if companies grow at different rates or if their cost of equity or risk-free rate changes rapidly. Why is the intrinsic value higher than the current share price? At ACCENTRO Real Estate, we’ve summarized three fundamental factors to look at.
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risk: Every company has them and we discovered that 4 warning signs for ACCENTRO Real Estate (Two of which we don’t really like!) You should know.
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future earnings: How does A4Y’s growth rate compare to its peers and the broader market? Explore the analyst consensus numbers for the coming years in more detail by interacting with the free Analyst Growth Expectations chart.
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Other solid businesses: Low debt, high return on equity, and good past performance are the fundamentals of a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you haven’t considered before?
PS. Simply Wall St updates DCF calculations for all German stocks daily, so if you want to know the intrinsic value of other stocks, search here.
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This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst forecasts, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.