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A Look At The Intrinsic Value Of CPI Property Group (ETR:O5G)

Key Insights

  • Using the 2 Stage Free Cash Flow to Equity, CPI Property Group fair value estimate is €0.85

  • With €0.92 share price, CPI Property Group appears to be trading close to its estimated fair value

  • Industry average of 100% suggests CPI Property Group's peers are currently trading at a higher premium to fair value

Today we will run through one way of estimating the intrinsic value of CPI Property Group (ETR:O5G) 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.

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.

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See our latest analysis for CPI Property Group

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. To begin with, we have to get estimates of the next ten years of cash flows. 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.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) estimate

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

Levered FCF (€, Millions)

€595.2m

€660.0m

€710.8m

€749.7m

€778.9m

€800.7m

€817.0m

€829.2m

€838.4m

€845.6m

Growth Rate Estimate Source

Est @ 15.47%

Est @ 10.90%

Est @ 7.70%

Est @ 5.46%

Est @ 3.90%

Est @ 2.80%

Est @ 2.03%

Est @ 1.49%

Est @ 1.12%

Est @ 0.85%

Present Value (€, Millions) Discounted @ 11%

€538

€538

€524

€499

€468

€435

€400

€367

€335

€305

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = €4.4b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 11%.

Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = €846m× (1 + 0.2%) ÷ (11%– 0.2%) = €8.1b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= €8.1b÷ ( 1 + 11%)10= €2.9b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is €7.3b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of €0.9, the company appears around fair value at the time of writing. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

dcf
dcf

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 CPI Property Group 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 1.764. 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 CPI Property Group

Strength

  • Debt is well covered by earnings.

Weakness

  • Earnings declined over the past year.

  • Current share price is above our estimate of fair value.

Opportunity

  • O5G's financial characteristics indicate limited near-term opportunities for shareholders.

  • Lack of analyst coverage makes it difficult to determine O5G's earnings prospects.

Threat

  • Debt is not well covered by operating cash flow.

Next Steps:

Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For CPI Property Group, we've put together three pertinent factors you should consider:

  1. Risks: We feel that you should assess the 3 warning signs for CPI Property Group (1 can't be ignored!) we've flagged before making an investment in the company.

  2. 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!

  3. Other Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!

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

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

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.

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