Is There An Opportunity With D-Market Elektronik Hizmetler ve Ticaret A.S.'s (NASDAQ:HEPS) 27% Undervaluation?

Simply Wall St
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Key Insights

Does the August share price for D-Market Elektronik Hizmetler ve Ticaret A.S. (NASDAQ:HEPS) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by projecting its future cash flows and then discounting them to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. Don't get put off by the jargon, the math behind it is actually quite straightforward.

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

View our latest analysis for D-Market Elektronik Hizmetler ve Ticaret

Crunching The Numbers

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. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or 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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, 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

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

Levered FCF (TRY, Millions)

₺1.69b

₺2.17b

₺2.54b

₺2.85b

₺3.12b

₺3.34b

₺3.53b

₺3.69b

₺3.84b

₺3.96b

Growth Rate Estimate Source

Analyst x1

Analyst x1

Est @ 16.81%

Est @ 12.41%

Est @ 9.33%

Est @ 7.18%

Est @ 5.67%

Est @ 4.61%

Est @ 3.88%

Est @ 3.36%

Present Value (TRY, Millions) Discounted @ 18%

₺1.4k

₺1.6k

₺1.6k

₺1.5k

₺1.4k

₺1.3k

₺1.1k

₺1.0k

₺893

₺785

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₺13b

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 18%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = ₺4.0b× (1 + 2.2%) ÷ (18%– 2.2%) = ₺26b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= ₺26b÷ ( 1 + 18%)10= ₺5.2b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₺18b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of US$1.5, the company appears a touch undervalued at a 27% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

dcf
dcf

The Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 D-Market Elektronik Hizmetler ve Ticaret 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 18%, which is based on a levered beta of 1.039. 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.

SWOT Analysis for D-Market Elektronik Hizmetler ve Ticaret

Strength

  • Debt is not viewed as a risk.

Weakness

  • No major weaknesses identified for HEPS.

Opportunity

  • Has sufficient cash runway for more than 3 years based on current free cash flows.

  • Good value based on P/S ratio and estimated fair value.

Threat

  • Not expected to become profitable over the next 3 years.

Looking Ahead:

Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for a company. DCF models are not the be-all and end-all of investment valuation. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Why is the intrinsic value higher than the current share price? For D-Market Elektronik Hizmetler ve Ticaret, we've put together three essential elements you should further research:

  1. Risks: For example, we've discovered 2 warning signs for D-Market Elektronik Hizmetler ve Ticaret that you should be aware of before investing here.

  2. Future Earnings: How does HEPS'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 Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NASDAQGS every day. If you want to find the calculation for other stocks just search here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.

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