Estimating The Fair Value Of SC Biroul de Turism Pentru Tineret SA (BVB:BIBU)

Key Insights

• The projected fair value for SC Biroul de Turism Pentru Tineret is RON4.83 based on 2 Stage Free Cash Flow to Equity
• With RON4.54 share price, SC Biroul de Turism Pentru Tineret appears to be trading close to its estimated fair value
• Peers of SC Biroul de Turism Pentru Tineret are currently trading on average at a 27% premium

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of SC Biroul de Turism Pentru Tineret SA (BVB:BIBU) as an investment opportunity by projecting its future cash flows and then discounting them to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

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Step By Step Through The Calculation

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. 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 discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

	2026	2027	2028	2029	2030	2031	2032	2033	2034	2035
Levered FCF (RON, Millions)	RON816.6k	RON1.21m	RON1.64m	RON2.08m	RON2.51m	RON2.92m	RON3.30m	RON3.67m	RON4.02m	RON4.37m
Growth Rate Estimate Source	Est @ 66.31%	Est @ 48.26%	Est @ 35.63%	Est @ 26.78%	Est @ 20.59%	Est @ 16.25%	Est @ 13.22%	Est @ 11.10%	Est @ 9.61%	Est @ 8.57%
Present Value (RON, Millions) Discounted @ 14%	RON0.7	RON0.9	RON1.1	RON1.2	RON1.3	RON1.3	RON1.3	RON1.3	RON1.2	RON1.1

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = RON11m

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 6.1%. We discount the terminal cash flows to today's value at a cost of equity of 14%.

Terminal Value (TV)= FCF₂₀₃₅ × (1 + g) ÷ (r – g) = RON4.4m× (1 + 6.1%) ÷ (14%– 6.1%) = RON56m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= RON56m÷ ( 1 + 14%)¹⁰= RON15m

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is RON26m. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of RON4.5, the company appears about fair value at a 6.0% 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.

Important Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 SC Biroul de Turism Pentru Tineret 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 14%, which is based on a levered beta of 1.133. 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.

Check out our latest analysis for SC Biroul de Turism Pentru Tineret

Looking Ahead:

Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for a company. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true 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 sharply, the output can look very different. For SC Biroul de Turism Pentru Tineret, there are three additional aspects you should further examine:

1. Risks: For instance, we've identified 3 warning signs for SC Biroul de Turism Pentru Tineret (2 are a bit concerning) you should be aware of.
2. 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!
3. Other Top Analyst Picks: Interested to see what the analysts are thinking? Take a look at our interactive list of analysts' top stock picks to find out what they feel might have an attractive future outlook!

PS. Simply Wall St updates its DCF calculation for every Romanian stock every day, so if you want to find the intrinsic value of any other stock just search here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.