key insights
-
Instone Real Estate Group’s expected fair value is €5.12 based on a dividend discount model.
-
Instone Real Estate Group is estimated to be overvalued by 27% based on the current share price of €6.51
-
The analyst price target for INS is €9.00, 76% above our fair value estimate.
Does Instone Real Estate Group SE (ETR:INS)’s December share price reflect its actual value? Today we’ll discount the expected future cash flows to today’s value to calculate the stock’s intrinsic value. Estimate. The discounted cash flow (DCF) model is the tool we apply to do this. It may seem very complicated, but it’s actually not that much.
It’s worth pointing out that DCF isn’t perfect for every situation, as companies are valued in many different ways. To learn a little more about intrinsic value, read the Simply Wall St analysis model.
Check out our latest analysis for Instone Real Estate Group.
calculate numbers
Instone Real Estate Group is a real estate company, so we have to calculate its value a little differently than other stocks. Instead of using free cash flow, which is difficult to estimate in this industry and often not reported by analysts, dividend per share (DPS) payments are used. Unless the company pays out a significant portion of its FCF as dividends, this method typically results in the stock being undervalued. The “Gordon Growth Model” is used, which simply assumes that dividend payments continue to increase at a sustainable growth rate forever. Dividends are expected to grow at an annual rate comparable to the five-year average 0.5% yield on 10-year Treasury bonds. This number is then discounted to its current value at a cost of capital of 7.1%. Compared to the current share price of €6.5, the company looks slightly overvalued at the time of writing. However, keep in mind that this is just a rough estimate and like any complex formula, garbage goes in and garbage goes out.
Value per share = Expected dividend per share / (discount rate – perpetual growth rate)
= 0.3 euro / (7.1% – 0.5%)
= 5.1 euro
Prerequisites
The above calculation relies heavily on two assumptions. One is the discount rate and the other is the cash flow. If you disagree with these results, try doing the calculations yourself and test your assumptions. 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. Because we are considering Instone Real Estate Group as a potential shareholder, the cost of equity is used as the discount rate, rather than the cost of equity considering debt (or weighted average cost of capital, WACC). For this calculation, we used 7.1% based on a leverage beta of 1.332. 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 and are constrained to a range of 0.8 to 2.0, which is a reasonable range for stable businesses.
SWOT analysis of Instone Real Estate Group
strength
Weakness
opportunity
threat
Next steps:
A company’s valuation is important, but it shouldn’t be the only metric you look at when researching a company. It is not possible to obtain a reliable valuation with the DCF model. If possible, it’s a good idea to apply different cases and assumptions and see how they affect the company’s valuation. 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 lower than the current share price? We’ve put together three aspects of Instone Real Estate Group that you should consider further.
-
risk: For example, I discovered the following: 3 warning signs for Instone Real Estate Group (Two things make us uncomfortable!) Here’s what you need to know before investing.
-
future earnings: How does INS’s growth rate compare to its peers and the broader market? Dive deeper into analyst consensus numbers for the coming years by interacting with the free Analyst Growth Expectations chart.
-
Other strong 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. The Simply Wall St app performs daily discounted cash flow valuations for all stocks on XTRA. If you want to know the calculations for other stocks, please search here.
Have feedback on this article? Curious about its content? contact Please contact us directly. Alternatively, email our editorial team at Simplywallst.com.
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.