U.S. markets close in 5 hours 11 minutes
  • S&P 500

    4,454.40
    -1.08 (-0.02%)
     
  • Dow 30

    35,018.69
    +220.69 (+0.63%)
     
  • Nasdaq

    14,981.43
    -66.27 (-0.44%)
     
  • Russell 2000

    2,279.96
    +31.89 (+1.42%)
     
  • Crude Oil

    75.35
    +1.37 (+1.85%)
     
  • Gold

    1,752.00
    +0.30 (+0.02%)
     
  • Silver

    22.68
    +0.26 (+1.16%)
     
  • EUR/USD

    1.1707
    -0.0011 (-0.09%)
     
  • 10-Yr Bond

    1.4750
    +0.0150 (+1.03%)
     
  • GBP/USD

    1.3719
    +0.0038 (+0.28%)
     
  • USD/JPY

    110.9170
    +0.2320 (+0.21%)
     
  • BTC-USD

    43,355.12
    +128.29 (+0.30%)
     
  • CMC Crypto 200

    1,082.91
    -18.61 (-1.69%)
     
  • FTSE 100

    7,070.20
    +18.72 (+0.27%)
     
  • Nikkei 225

    30,240.06
    -8.75 (-0.03%)
     

Is Atlantica Sustainable Infrastructure plc (NASDAQ:AY) Trading At A 34% Discount?

  • Oops!
    Something went wrong.
    Please try again later.
·6 min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Atlantica Sustainable Infrastructure plc (NASDAQ:AY) as an investment opportunity by taking the expected 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. It may sound complicated, but actually it is quite simple!

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. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

Check out our latest analysis for Atlantica Sustainable Infrastructure

The model

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 start off with, we need to estimate 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 need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) estimate

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Levered FCF ($, Millions)

US$390.9m

US$384.3m

US$382.3m

US$383.5m

US$386.9m

US$391.9m

US$398.0m

US$405.0m

US$412.7m

US$420.9m

Growth Rate Estimate Source

Est @ -3.35%

Est @ -1.68%

Est @ -0.51%

Est @ 0.31%

Est @ 0.88%

Est @ 1.28%

Est @ 1.56%

Est @ 1.76%

Est @ 1.9%

Est @ 2%

Present Value ($, Millions) Discounted @ 9.9%

US$356

US$318

US$288

US$263

US$241

US$222

US$205

US$190

US$176

US$163

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$2.4b

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 a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.2%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 9.9%.

Terminal Value (TV)= FCF2030 × (1 + g) ÷ (r – g) = US$421m× (1 + 2.2%) ÷ (9.9%– 2.2%) = US$5.6b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$5.6b÷ ( 1 + 9.9%)10= US$2.2b

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 US$4.6b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of US$29.9, the company appears quite good value at a 34% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf
dcf

The assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the 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 Atlantica Sustainable Infrastructure 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 9.9%, which is based on a levered beta of 1.115. 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 is only one of many factors that you need to assess for a company. It's not possible to obtain a foolproof valuation with a DCF model. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Can we work out why the company is trading at a discount to intrinsic value? For Atlantica Sustainable Infrastructure, we've compiled three essential aspects you should further examine:

  1. Risks: To that end, you should learn about the 3 warning signs we've spotted with Atlantica Sustainable Infrastructure (including 2 which shouldn't be ignored) .

  2. Future Earnings: How does AY'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 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!

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

This article by Simply Wall St is general in nature. 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.