In this article we are going to estimate the intrinsic value of Public Joint-Stock Company Federal Hydro-Generating Company – RusHydro (MCX:HYDR) by taking the expected future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they’re fairly easy to follow.
We generally believe that a company’s value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.
Check out our latest analysis for Federal Hydro-Generating Company – RusHydro
The calculation
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company’s cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren’t available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today’s value:
10-year free cash flow (FCF) forecast
2021 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | |
Levered FCF (RUB, Millions) | ₽17.2b | ₽25.0b | ₽36.4b | ₽39.2b | ₽42.1b | ₽45.3b | ₽48.8b | ₽52.7b | ₽56.9b | ₽61.5b |
Growth Rate Estimate Source | Analyst x2 | Analyst x2 | Analyst x2 | Analyst x2 | Est @ 7.31% | Est @ 7.6% | Est @ 7.8% | Est @ 7.95% | Est @ 8.05% | Est @ 8.12% |
Present Value (RUB, Millions) Discounted @ 16% | ₽14.8k | ₽18.4k | ₽23.1k | ₽21.4k | ₽19.8k | ₽18.3k | ₽16.9k | ₽15.7k | ₽14.6k | ₽13.6k |
(“Est” = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₽177b
After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 8.3%. We discount the terminal cash flows to today’s value at a cost of equity of 16%.
Terminal Value (TV)= FCF2030 × (1 + g) ÷ (r – g) =…
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