Estimating The Intrinsic Value Of Public Joint Stock Company Mosenergo (MCX:MSNG)

Alexis Guardo

Updated Mon, Aug 20, 2018, 7:59 AM

How far off is Public Joint Stock Company Mosenergo (MCX:MSNG) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced by taking the foreast future cash flows of the company and discounting them back to today’s value. I will use the Discounted Cash Flows (DCF) model. It may sound complicated, but actually it is quite simple! Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Please also note that this article was written in August 2018 so be sure check out the updated calculation by following the link below.

See our latest analysis for Mosenergo

Is MSNG fairly valued?

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 five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. The sum of these cash flows is then discounted to today’s value.

5-year cash flow estimate

	2018	2019	2020	2021	2022
Levered FCF (RUB, Millions)	RUB24.24k	RUB6.35k	RUB3.99k	RUB3.21k	RUB6.38k
Source	Analyst x1	Analyst x3	Analyst x3	Analyst x3	Analyst x2
Present Value Discounted @ 13.41%	RUB21.37k	RUB4.94k	RUB2.73k	RUB1.94k	RUB3.40k

Present Value of 5-year Cash Flow (PVCF)= RUруб34.39b

After calculating the present value of future cash flows in the intial 5-year period we need to calculate the Terminal Value, which accounts for all the future cash flows beyond the first stage. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 7%. We discount this to today’s value at a cost of equity of 13.4%.

Terminal Value (TV) = FCF₂₀₂₂ × (1 + g) ÷ (r – g) = RUруб6.38b × (1 + 7%) ÷ (13.4% – 7%) = RUруб107.39b

Present Value of Terminal Value (PVTV) = TV / (1 + r)⁵ = RUруб107.39b ÷ ( 1 + 13.4%)⁵ = RUруб57.24b

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is RUруб91.63b. To get the intrinsic value per share, we divide this by the total number of shares outstanding, or the equivalent number if this is a depositary receipt or ADR. This results in an intrinsic value of RUB2.31. Compared to the current share price of RUB2.03, the stock is about right, perhaps slightly undervalued at a 12.40% discount to what it is available for right now.

MISX:MSNG Intrinsic Value Export August 20th 18

Important assumptions

I’d like to 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 my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at Mosenergo as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 13.4%, which is based on a levered beta of 0.800. This is derived from the Bottom-Up Beta method based on 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, DCF calculation shouldn’t be the only metric you look at when researching a company. For MSNG, I’ve compiled three essential factors you should further research:

Financial Health: Does MSNG have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
Future Earnings: How does MSNG’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.
Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of MSNG? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St does a DCF calculation for every RU stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

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