Manitou BF SA (EPA:MTU) Is Trading At A 44.64% Discount

Ingrid Hart

Sun, Feb 17, 2019, 12:43 AM

I am going to run you through how I calculated the intrinsic value of Manitou BF SA (EPA:MTU) 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! If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model. Please also note that this article was written in February 2019 so be sure check out the updated calculation by following the link below.

See our latest analysis for Manitou BF

The model

I’m 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 perpetual stable growth rate. To start off with we need to estimate 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 forecast

	2019	2020	2021	2022	2023
Levered FCF (€, Millions)	€59.00	€73.11	€85.00	€140.00	€149.70
Source	Analyst x6	Analyst x7	Analyst x1	Analyst x1	Est @ 6.93%
Present Value Discounted @ 8.15%	€54.55	€62.51	€67.20	€102.35	€101.19

Present Value of 5-year Cash Flow (PVCF)= €388m

The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of the GDP. In this case I have used the 10-year government bond rate (0.7%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 8.1%.

Terminal Value (TV) = FCF₂₀₂₃ × (1 + g) ÷ (r – g) = €150m × (1 + 0.7%) ÷ (8.1% – 0.7%) = €2.0b

Present Value of Terminal Value (PVTV) = TV / (1 + r)⁵ = €2.0b ÷ ( 1 + 8.1%)⁵ = €1.4b

The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is €1.8b. 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 €46.06. Relative to the current share price of €25.5, the stock is quite undervalued at a 45% discount to what it is available for right now.

ENXTPA:MTU Intrinsic Value Export February 17th 19

The 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 my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Manitou BF 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 8.1%, 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:

Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For MTU, I’ve compiled three fundamental aspects you should further research:

Financial Health: Does MTU 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 MTU’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 MTU? 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 for every stock on the EPA every 6 hours. If you want to find the calculation for other stocks 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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