The projected fair value for EVE Energy is CN¥43.60 based on 2 Stage Free Cash Flow to Equity
EVE Energy's CN¥33.41 share price signals that it might be 23% undervalued
The CN¥44.20 analyst price target for 300014 is 1.4% more than our estimate of fair value
How far off is EVE Energy Co., Ltd. (SZSE:300014) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. 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.
The Calculation
We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To begin with, we have to get estimates of the next ten years of cash flows. 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, so we discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) estimate
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF (CN¥, Millions)
CN¥4.00b
CN¥4.75b
CN¥5.32b
CN¥5.81b
CN¥6.24b
CN¥6.61b
CN¥6.94b
CN¥7.24b
CN¥7.53b
CN¥7.80b
Growth Rate Estimate Source
Analyst x4
Analyst x4
Est @ 11.93%
Est @ 9.21%
Est @ 7.30%
Est @ 5.96%
Est @ 5.03%
Est @ 4.38%
Est @ 3.92%
Est @ 3.60%
Present Value (CN¥, Millions) Discounted @ 9.3%
CN¥3.7k
CN¥4.0k
CN¥4.1k
CN¥4.1k
CN¥4.0k
CN¥3.9k
CN¥3.7k
CN¥3.6k
CN¥3.4k
CN¥3.2k
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = CN¥38b
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 2.9%. We discount the terminal cash flows to today's value at a cost of equity of 9.3%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥125b÷ ( 1 + 9.3%)10= CN¥51b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is CN¥89b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of CN¥33.4, the company appears a touch undervalued at a 23% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.
The Assumptions
Now 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 evaluation of a company's future performance, so try the calculation yourself and check your own assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at EVE Energy 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 accounts for debt. In this calculation we've used 9.3%, which is based on a levered beta of 1.290. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
SWOT Analysis for EVE Energy
Strength
Debt is not viewed as a risk.
Dividends are covered by earnings and cash flows.
Dividend information for 300014.
Weakness
Earnings declined over the past year.
Dividend is low compared to the top 25% of dividend payers in the Electrical market.
What are analysts forecasting for 300014?
Opportunity
Annual earnings are forecast to grow faster than the Chinese market.
Good value based on P/E ratio and estimated fair value.
Threat
No apparent threats visible for 300014.
Looking Ahead:
Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Why is the intrinsic value higher than the current share price? For EVE Energy, we've compiled three relevant elements you should explore:
Risks: To that end, you should be aware of the 2 warning signs we've spotted with EVE Energy .
Future Earnings: How does 300014'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 Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the SZSE every day. If you want to find the calculation for other stocks just search here.
Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com. This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
现在折现现金流最重要的输入是折现率,当然还有实际现金流。 投资的一部分是对公司未来表现提出自己的评估,因此请尝试自己计算并核对自己的假设。 DCF也没有考虑产业可能的周期性,或者公司未来的资本需求,因此未能全面展示公司潜在表现。 鉴于我们正在考虑 EVE Energy 作为潜在股东,使用的权益成本作为折现率,而非资本成本(或加权平均资本成本,WACC)考虑了负债。 在这个计算中,我们使用了9.3%,这基于1.290的杠杆贝塔。 贝塔是股票的波动性指标,与整个市场进行比较。 我们从具有全球可比公司的行业平均贝塔获得我们的贝塔,设定在0.8和2.0之间,这是一个稳定业务的合理范围。