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A Look At The Fair Value Of Acerinox SA (BME:ACX)

I am going to run you through how I calculated the intrinsic value of Acerinox SA (BME:ACX) 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. 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 October 2018 then I highly recommend you check out the latest calculation for Acerinox by following the link below.

Check out our latest analysis for Acerinox

What’s the value?

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 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. 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 forecast

2019 2020 2021 2022 2023
Levered FCF (€, Millions) €239.35 €279.03 €324.00 €330.53 €337.20
Source Analyst x10 Analyst x6 Analyst x2 Est @ 2.02% Est @ 2.02%
Present Value Discounted @ 11.73% €214.22 €223.51 €232.28 €212.08 €193.63

Present Value of 5-year Cash Flow (PVCF)= €1.08b

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 1.3%. We discount this to today’s value at a cost of equity of 11.7%.

Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = €337.2m × (1 + 1.3%) ÷ (11.7% – 1.3%) = €3.27b

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = €3.27b ÷ ( 1 + 11.7%)5 = €1.88b

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 €2.95b. 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 €10.7. Compared to the current share price of €12.36, the stock is fair value, maybe slightly overvalued and not available at a discount at this time.

BME:ACX Intrinsic Value Export October 2nd 18

The 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 Acerinox 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 11.7%, which is based on a levered beta of 1.199. 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. For ACX, I’ve put together three relevant aspects you should further research:

  1. Financial Health: Does ACX 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 ACX’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 ACX? 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 BME 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.