Does the January share price for Teleste Corporation (
HEL:TLT1V
) reflect it’s really worth?weaning from exclusively pumping Today, I will calculate the stock’s intrinsic value by projecting its future cash flows and then discounting them to today’s value. I will be 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
. Please also note that this article was written in January 2019 so be sure check out the updated calculation by following the link below.
See our latest analysis for Teleste
Crunching the numbers
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. The sum of these cash flows is then discounted to today’s value.
5-year cash flow forecast
2019
2020
2021
2022
2023
Levered FCF (€, Millions)
€10.45
€11.10
€10.30
€10.00
€9.50
Source
Analyst x2
Analyst x2
Analyst x1
Analyst x1
Analyst x1
Present Value Discounted @ 8.16%
€9.66
€9.49
€8.14
€7.31
€6.42
Present Value of 5-year Cash Flow (PVCF)
= €41m
We now need to calculate the Terminal Value, which accounts for all the future cash flows after the five years. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 0.8%. We discount this to today’s value at a cost of equity of 8.2%.
Terminal Value (TV)
= FCF
2023
× (1 + g) ÷ (r – g) = €9.5m × (1 + 0.8%) ÷ (8.2% – 0.8%) = €130m
Present Value of Terminal Value (PVTV)
= TV / (1 + r)
5
= €130m ÷ ( 1 + 8.2%)
5
= €88m
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 €129m. 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 €7.08
. Relative to the current share price of €5.26, the stock is about right, perhaps slightly undervalued at a 26% discount to what it is available for right now.
HLSE:TLT1V Intrinsic Value Export January 2nd 19
The assumptions
Now 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 Teleste 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 8.2%, which is based on a levered beta of 0.800. 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.
Story continues
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 TLT1V, I’ve put together three fundamental aspects you should further research:
Financial Health
: Does TLT1V 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 TLT1V’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 TLT1V? 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 HEL 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
.
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