Is There An Opportunity With SMCP S.A.'s (EPA:SMCP) 43% Undervaluation?

Simply Wall St · 6d ago

Key Insights

  • Using the 2 Stage Free Cash Flow to Equity, SMCP fair value estimate is €4.60
  • SMCP's €2.61 share price signals that it might be 43% undervalued
  • Analyst price target for SMCP is €4.58 which is similar to our fair value estimate

How far off is SMCP S.A. (EPA:SMCP) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by projecting its future cash flows and then discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

View our latest analysis for SMCP

The Model

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. In the first stage we need to estimate the cash flows to the business over 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 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.

Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) forecast

2025 2026 2027 2028 2029 2030 2031 2032 2033 2034
Levered FCF (€, Millions) €41.2m €63.9m €47.4m €39.1m €34.4m €31.6m €30.0m €29.0m €28.4m €28.1m
Growth Rate Estimate Source Analyst x1 Analyst x1 Est @ -25.75% Est @ -17.66% Est @ -11.99% Est @ -8.02% Est @ -5.24% Est @ -3.30% Est @ -1.94% Est @ -0.98%
Present Value (€, Millions) Discounted @ 11% €37.2 €52.2 €35.0 €26.0 €20.7 €17.2 €14.7 €12.9 €11.4 €10.2

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = €238m

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 (1.2%) 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 11%.

Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = €28m× (1 + 1.2%) ÷ (11%– 1.2%) = €302m

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= €302m÷ ( 1 + 11%)10= €109m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is €347m. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of €2.6, the company appears quite good value at a 43% 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.

dcf
ENXTPA:SMCP Discounted Cash Flow September 28th 2024

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. If you don't agree with these result, have a go at the calculation yourself and play with the 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 SMCP 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 11%, 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 SMCP

Strength
  • Debt is well covered by cash flow.
Weakness
  • Interest payments on debt are not well covered.
Opportunity
  • Expected to breakeven next year.
  • Has sufficient cash runway for more than 3 years based on current free cash flows.
  • Good value based on P/S ratio and estimated fair value.
Threat
  • No apparent threats visible for SMCP.

Next Steps:

Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for a company. It's not possible to obtain a foolproof valuation with a DCF model. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Can we work out why the company is trading at a discount to intrinsic value? For SMCP, we've compiled three pertinent factors you should consider:

  1. Risks: Every company has them, and we've spotted 1 warning sign for SMCP you should know about.
  2. Future Earnings: How does SMCP's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
  3. Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the ENXTPA every day. If you want to find the calculation for other stocks just search here.