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Is There An Opportunity With Echo Investment SA.’s (WSE:ECH) 31% Undervaluation?

Jodi Pearce

Today I will be providing a simple run-through of the discounted cash flows (DCF) method to estimate the attractiveness of Echo Investment SA. (WSE:ECH) as an investment opportunity. If you want to learn more about this method, the basis for my calculations can be found in detail in the Simply Wall St analysis model. If you are reading this after April 2018 then I highly recommend you check out the latest calculation for Echo Investment here.

Crunching the numbers

I use what is known as the 2-stage model, which simply means we take in account two stages of company’s growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have perpetual stable growth rate. Firstly, I pulled together the analyst consensus estimates of ECH’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity of 8.67%. This resulted in a present value of 5-year cash flow of ZŁ818.45M. Want to understand how I arrived at this number? Read our detailed analysis here.

WSE:ECH Future Profit Apr 11th 18

In the visual above, we see how how ECH’s top and bottom lines are expected to move in the future, which should give you some color on ECH’s outlook. Next, I calculate the terminal value, which accounts for all the future cash flows after the five years. I’ve decided to use the 10-year government bond rate of 2.8% as the stable growth rate, which is rightly below GDP growth, but more towards the conservative side. The present value of the terminal value after discounting it back five years is ZŁ2.39B.

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is ZŁ3.21B. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of PLN7.77, which, compared to the current share price of PLN5.37, we see that Echo Investment is quite undervalued at a 30.90% discount to what it is available for right now.

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. What is the reason for the share price to differ from the intrinsic value? For ECH, there are three important aspects you should look at:

  1. Financial Health: Does ECH 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 ECH’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 ECH? 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 PL stock every 6 hours, so if you want to find the intrinsic value of any other stock 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.