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Is There An Opportunity With Iren SpA’s (BIT:IRE) 23.06% Undervaluation?

Mary Ramos

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In this article I am going to calculate the intrinsic value of Iren SpA (BIT:IRE) 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. It may sound complicated, but actually it is quite simple! Anyone interested in learning a bit more about intrinsic value should have a read of 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 Iren by following the link below.

See our latest analysis for Iren

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 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) €73.40 €53.61 €203.00 €266.50 €356.50
Source Analyst x5 Analyst x4 Analyst x4 Analyst x2 Analyst x2
Present Value Discounted @ 10.63% €66.35 €43.81 €149.93 €177.91 €215.13

Present Value of 5-year Cash Flow (PVCF)= €653m

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 the GDP. In this case I have used the 10-year government bond rate (2.9%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 10.6%.

Terminal Value (TV) = FCF2023 × (1 + g) ÷ (r – g) = €357m × (1 + 2.9%) ÷ (10.6% – 2.9%) = €4.8b

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = €4.8b ÷ ( 1 + 10.6%)5 = €2.9b

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is €3.5b. The last step is to then 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) then we use the equivalent number. This results in an intrinsic value of €2.71. Compared to the current share price of €2.09, the stock is about right, perhaps slightly undervalued at a 23% discount to what it is available for right now.

BIT:IRE Intrinsic Value Export February 11th 19

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 Iren 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 10.6%, which is based on a levered beta of 1.089. 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. What is the reason for the share price to differ from the intrinsic value? For IRE, I’ve compiled three pertinent factors you should look at:

  1. Financial Health: Does IRE 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 IRE’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 IRE? 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 BIT 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.