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The intrinsic value of Compañía de Distribución Integral Logista Holdings, SA (BME:LOG) is potentially 40% higher than its share price


Today we are going to give a simple overview of a valuation method used to estimate the attractiveness of Compañía de Distribución Integral Logista Holdings, SA (BME:LOG) as an investment opportunity by projecting its future cash flows and then discounting them to the present value. This will be done using the discounted cash flow (DCF) model. Don’t be put off by the jargon, the underlying calculations are actually quite simple.

Businesses can be valued in many ways, which is why we emphasize that a DCF is not perfect for all situations. If you want to know more about discounted cash flow, the rationale for this calculation can be read in detail in the Simply Wall St analysis template.

Check opportunities and risks within the XX Logistics industry.

Step by step through the calculation

We use what is called a 2-step model, which simply means that we have two different periods of company cash flow growth rates. Generally, the first stage is a higher growth phase and the second stage is a lower growth phase. In the first step, we need to estimate the company’s cash flow over the next ten years. Wherever possible, we use analysts’ estimates, but where these are not available, we extrapolate the previous free cash flow (FCF) from the latest estimate or reported value. We assume that companies with decreasing free cash flow will slow their rate of contraction and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow more in early years than in later years.

Generally, we assume that a dollar today is worth more than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today’s dollars:

Estimated free cash flow (FCF) over 10 years

2023 2024 2025 2026 2027 2028 2029 2030 2031 2032
Leveraged FCF (€, Millions) €217.0 million €318.4 million €281.0m €259.2 million €245.8 million €237.6 million €232.7 million €229.9 million €228.7 million €228.4 million
Growth rate estimate Source Analyst x3 Analyst x4 Analyst x1 Is @ -7.77% East @ -5.16% Is @ -3.34% East @ -2.07% Is @ -1.17% Is @ -0.55% Is @ -0.11%
Present value (€, millions) discounted at 7.0% 203 € 278 € 229 € 198 € 175 € 158 € 145 € 134 € 124 € 116 €

(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = €1.8 billion

We now need to calculate the terminal value, which represents all future cash flows after this ten-year period. For a number of reasons, a very conservative growth rate is used which cannot exceed that of a country’s GDP growth. In this case, we used the 5-year average of the 10-year government bond yield (0.9%) to estimate future growth. Similar to the 10-year “growth” period, we discount future cash flows to present value, using a cost of equity of 7.0%.

Terminal value (TV)= FCF2032 × (1 + g) ÷ (r – g) = €228 million × (1 + 0.9%) ÷ (7.0%–0.9%) = €3.8 billion

Present value of terminal value (PVTV)= TV / (1 + r)ten= €3.8 billion÷ ( 1 + 7.0%)ten= €1.9bn

The total value is the sum of the cash flows for the next ten years plus the present terminal value, which gives the total equity value, which in this case is 3.7 billion euros. To get the intrinsic value per share, we divide it by the total number of shares outstanding. Compared to the current share price of €20.0, the company looks slightly undervalued at a 28% discount to the current share price. Ratings are imprecise instruments, however, much like a telescope – move a few degrees and end up in a different galaxy. Keep that in mind.

BME: LOG Discounted Cash Flow October 27, 2022

Important assumptions

We emphasize that 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 assessment of a company’s future performance, so try the math yourself and check your own assumptions. The DCF also does not take into account the possible cyclicality of an industry, nor the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we consider Compañía de Distribución Integral Logista Holdings 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 takes into account the debt. In this calculation, we used 7.0%, which is based on a leveraged beta of 0.948. Beta is a measure of a stock’s volatility relative to the market as a whole. We derive our beta from the average industry beta of broadly comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.

SWOT Analysis for Compañía de Distribución Integral Logista Holdings

  • Earnings growth over the past year has exceeded its 5-year average.
  • Debt is not considered a risk.
  • Dividends are covered by earnings and cash flow.
  • Earnings growth over the past year has underperformed the logistics sector.
  • The dividend is low compared to the top 25% dividend payers in the logistics market.
  • Annual revenues are expected to increase over the next 4 years.
  • Good value based on P/E ratio and estimated fair value.
  • Annual earnings are expected to grow more slowly than the Spanish market.

Look forward:

Although a business valuation is important, it is only one of many factors you need to assess for a business. DCF models are not the be-all and end-all of investment valuation. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under/overvalued?” For example, changes in the company’s cost of equity or the risk-free rate can have a significant impact on the valuation. Can we understand why the company is trading at a discount to its intrinsic value? For Compañía de Distribución Integral Logista Holdings, there are three important elements to consider:

  1. Risks: You should be aware of the 1 warning sign for Compañía de Distribución Integral Logista Holdings we found out before considering an investment in the business.
  2. Future earnings: How does LOG’s growth rate compare to its peers and the market in general? Dive deeper into the analyst consensus figure for the coming years by interacting with our free analyst growth forecast chart.
  3. Other high-quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality actions to get an idea of ​​what you might be missing!

PS. Simply Wall St updates its DCF calculation for every Spanish stock every day, so if you want to find the intrinsic value of any other stock, do a search here.

Valuation is complex, but we help make it simple.

Find out if Company of Distribución Integral Logista Holdings is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.

See the free analysis

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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