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Investors Are Undervaluing Gr Sarantis SA (ATH:SAR) By 34.04%

Ray Foley

Today I will be providing a simple run through of a valuation method used to estimate the attractiveness of Gr Sarantis SA (ATH:SAR) as an investment opportunity 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 June 2018 so be sure check out the updated calculation by following the link below. View out our latest analysis for Gr. Sarantis

The method

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. To begin with we have to get estimates of the next five years of cash flows. Where possible I use analyst estimates, but when these aren’t available I have extrapolated the previous free cash flow (FCF) from the year before. For this growth rate I used the average annual growth rate over the past five years, but capped at a reasonable level. I then discount the sum of these cash flows to arrive at a present value estimate.

5-year cash flow forecast

2018 2019 2020 2021 2022
Levered FCF (€, Millions) €-3.10 €28.60 €35.80 €39.34 €43.22
Source Analyst x1 Analyst x1 Analyst x1 Extrapolated @ (9.88%) Extrapolated @ (9.88%)
Present Value Discounted @ 8.87% €-2.85 €24.13 €27.74 €28.00 €28.26

Present Value of 5-year Cash Flow (PVCF)= €105.29m

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. 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 (4.3%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 8.9%.

Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = €43.22m × (1 + 4.3%) ÷ (8.9% – 4.3%) = €997.32m

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = €997.32m ÷ ( 1 + 8.9%)5 = €652.09m

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 €757.38m. In the final step we divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) or ADR then we use the equivalent number. This results in an intrinsic value of €11.28. Relative to the current share price of €7.44, the stock is quite undervalued at a 34.04% discount to what it is available for right now.

ATSE:SAR Intrinsic Value June 21st 18

Important 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 my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at Gr. Sarantis 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 8.9%, 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. What is the reason for the share price to differ from the intrinsic value? For SAR, I’ve compiled three relevant aspects you should further examine:

  1. Financial Health: Does SAR 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 SAR’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 SAR? 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 ATH every 6 hours. If you want to find the calculation for other stocks just search here.


To help readers see pass 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.