# Calculating The Intrinsic Value Of S.C. Confectii Vaslui S.A. (BVB:COVB)

Simply Wall St · 08/31 08:20

### Key Insights

• Using the 2 Stage Free Cash Flow to Equity, S.C. Confectii Vaslui fair value estimate is RON0.30
• Current share price of RON0.28 suggests S.C. Confectii Vaslui is potentially trading close to its fair value

In this article we are going to estimate the intrinsic value of S.C. Confectii Vaslui S.A. (BVB:COVB) by taking the expected future cash flows and discounting them to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Don't get put off by the jargon, the math behind it is actually quite straightforward.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

See our latest analysis for S.C. Confectii Vaslui

## The Model

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. In the first stage we need to estimate the cash flows to the business over the next ten years. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

#### 10-year free cash flow (FCF) estimate

 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 Levered FCF (RON, Millions) RON3.11m RON3.18m RON3.29m RON3.43m RON3.60m RON3.79m RON4.00m RON4.23m RON4.48m RON4.75m Growth Rate Estimate Source Est @ 0.56% Est @ 2.25% Est @ 3.44% Est @ 4.27% Est @ 4.85% Est @ 5.26% Est @ 5.55% Est @ 5.74% Est @ 5.88% Est @ 5.98% Present Value (RON, Millions) Discounted @ 20% RON2.6 RON2.2 RON1.9 RON1.7 RON1.5 RON1.3 RON1.1 RON1.0 RON0.9 RON0.8

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = RON15m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (6.2%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 20%.

Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = RON4.7m× (1 + 6.2%) ÷ (20%– 6.2%) = RON37m

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= RON37m÷ ( 1 + 20%)10= RON6.1m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is RON21m. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of RON0.3, the company appears about fair value at a 6.8% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

## The Assumptions

We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at S.C. Confectii Vaslui 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 accounts for debt. In this calculation we've used 20%, which is based on a levered beta of 2.000. Beta is a measure of a stock's volatility, compared to the market as a whole. 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 business.

### SWOT Analysis for S.C. Confectii Vaslui

Strength
• Debt is well covered by earnings.
Weakness
• Earnings declined over the past year.
• Dividend is low compared to the top 25% of dividend payers in the Luxury market.
Opportunity
• Current share price is below our estimate of fair value.
• Lack of analyst coverage makes it difficult to determine COVB's earnings prospects.
Threat
• Debt is not well covered by operating cash flow.