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Investors Are Undervaluing Bonduelle SA (EPA:BON) By 34.23%

Ricardo Landis

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Does the February share price for Bonduelle SA (EPA:BON) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value by estimating the company’s future cash flows and discounting them to their present value. This is done using the Discounted Cash Flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. 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. If you are reading this and its not February 2019 then I highly recommend you check out the latest calculation for Bonduelle by following the link below.

See our latest analysis for Bonduelle

The calculation

I use what is known as a 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the first stage is higher growth, and the second stage is a more stable growth phase. In the first stage we need to estimate the cash flows to the business over the next five years. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount this to its value today and sum up the total to get the present value of these cash flows.

5-year cash flow estimate

2019 2020 2021 2022 2023
Levered FCF (€, Millions) €54.17 €78.64 €90.38 €97.01 €104.12
Source Analyst x4 Analyst x6 Analyst x5 Est @ 7.33% Est @ 7.33%
Present Value Discounted @ 8.15% €50.09 €67.24 €71.46 €70.92 €70.39

Present Value of 5-year Cash Flow (PVCF)= €330m

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 an annual growth rate equal to the 10-year government bond rate of 0.7%. We discount this to today’s value at a cost of equity of 8.1%.

Terminal Value (TV) = FCF2023 × (1 + g) ÷ (r – g) = €104m × (1 + 0.7%) ÷ (8.1% – 0.7%) = €1.4b

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = €1.4b ÷ ( 1 + 8.1%)5 = €956m

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is €1.3b. 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 €41.2. Compared to the current share price of €27.1, the stock is quite good value at a 34% discount to what it is available for right now.

ENXTPA:BON Intrinsic value, February 21st 2019

Important assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Bonduelle 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:

Although the valuation of a company is important, 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 BON, I’ve compiled three important aspects you should look at:

  1. Financial Health: Does BON 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.
  2. Future Earnings: How does BON’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: Are there other high quality stocks you could be holding instead of BON? 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 FR stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.