Calculating The Fair Value Of Bergbahnen Engelberg-Trübsee-Titlis AG (VTX:TIBN)

Key Insights

• Bergbahnen Engelberg-Trübsee-Titlis' estimated fair value is CHF46.79 based on 2 Stage Free Cash Flow to Equity

• Current share price of CHF40.70 suggests Bergbahnen Engelberg-Trübsee-Titlis is potentially trading close to its fair value

• Peers of Bergbahnen Engelberg-Trübsee-Titlis are currently trading on average at a 519% premium

Does the June share price for Bergbahnen Engelberg-Trübsee-Titlis AG (VTX:TIBN) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by estimating the company's future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. 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. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

View our latest analysis for Bergbahnen Engelberg-Trübsee-Titlis

Crunching The Numbers

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 discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (CHF, Millions)	CHF7.10m	CHF7.41m	CHF7.65m	CHF7.82m	CHF7.95m	CHF8.05m	CHF8.12m	CHF8.18m	CHF8.22m	CHF8.26m
Growth Rate Estimate Source	Est @ 6.28%	Est @ 4.45%	Est @ 3.17%	Est @ 2.28%	Est @ 1.65%	Est @ 1.21%	Est @ 0.91%	Est @ 0.69%	Est @ 0.54%	Est @ 0.44%
Present Value (CHF, Millions) Discounted @ 5.3%	CHF6.7	CHF6.7	CHF6.6	CHF6.4	CHF6.2	CHF5.9	CHF5.7	CHF5.4	CHF5.2	CHF4.9

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CHF60m

The second stage is also known as Terminal Value, this is the business's cash flow after 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 0.2%. We discount the terminal cash flows to today's value at a cost of equity of 5.3%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = CHF8.3m× (1 + 0.2%) ÷ (5.3%– 0.2%) = CHF163m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CHF163m÷ ( 1 + 5.3%)¹⁰= CHF98m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is CHF157m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of CHF40.7, the company appears about fair value at a 13% 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

Important Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 Bergbahnen Engelberg-Trübsee-Titlis 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 5.3%, which is based on a levered beta of 1.103. 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.

Next Steps:

Whilst important, the DCF calculation 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. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. 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 Bergbahnen Engelberg-Trübsee-Titlis, we've put together three additional factors you should assess:

1. Risks: We feel that you should assess the 1 warning sign for Bergbahnen Engelberg-Trübsee-Titlis we've flagged before making an investment in the company.

2. Future Earnings: How does TIBN'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 Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

PS. Simply Wall St updates its DCF calculation for every Swiss 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com