Technicolor SA (EPA:TCH) Is Trading At A 33.18% Discount
Does the share price for Technicolor SA (EPA:TCH) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value by taking the expected future cash flows and discounting them to their present 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 June 2018 then I highly recommend you check out the latest calculation for Technicolor by following the link below. Check out our latest analysis for Technicolor
The model
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. The sum of these cash flows is then discounted to today’s value.
5-year cash flow forecast
2018 | 2019 | 2020 | 2021 | 2022 | |
Levered FCF (€, Millions) | €43.53 | €76.53 | €121.30 | €130.30 | €139.97 |
Source | Analyst x3 | Analyst x4 | Analyst x3 | Extrapolated @ (7.42%) | Extrapolated @ (7.42%) |
Present Value Discounted @ 15.11% | €37.82 | €57.75 | €79.53 | €74.21 | €69.26 |
Present Value of 5-year Cash Flow (PVCF)= €318.57m
We now need to calculate the Terminal Value, which accounts for all the future cash flows after the five years. 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 (0.8%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 15.1%.
Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = €139.97m × (1 + 0.8%) ÷ (15.1% – 0.8%) = €984.17m
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = €984.17m ÷ ( 1 + 15.1%)5 = €486.95m
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is €805.51m. 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 €1.95. Relative to the current share price of €1.3, the stock is quite good value at a 33.18% discount to what it is available for right now.
Important assumptions
I’d like to point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual 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 Technicolor 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 15.1%, which is based on a levered beta of 1.554. 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:
Although the valuation of a company is important, 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 TCH, there are three fundamental aspects you should look at:
Financial Health: Does TCH 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.
Future Earnings: How does TCH’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.
Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of TCH? 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 EPA 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.
