Is There An Opportunity With D-Market Elektronik Hizmetler ve Ticaret A.S.'s (NASDAQ:HEPS) 25% Undervaluation?

Key Insights

• D-Market Elektronik Hizmetler ve Ticaret's estimated fair value is US$1.46 based on 2 Stage Free Cash Flow to Equity

• D-Market Elektronik Hizmetler ve Ticaret is estimated to be 25% undervalued based on current share price of US$1.09

• Analyst price target for HEPS is ₺2.55, which is 75% above our fair value estimate

How far off is D-Market Elektronik Hizmetler ve Ticaret A.S. (NASDAQ:HEPS) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by projecting its future cash flows and then discounting them to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

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.

See our latest analysis for D-Market Elektronik Hizmetler ve Ticaret

Step By Step Through 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. To start off with, we need to estimate 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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) estimate

	2023	2024	2025	2026	2027	2028	2029	2030	2031	2032
Levered FCF (TRY, Millions)	-₺736.0m	₺945.0m	₺1.32b	₺1.70b	₺2.04b	₺2.35b	₺2.61b	₺2.83b	₺3.02b	₺3.17b
Growth Rate Estimate Source	Analyst x1	Analyst x1	Est @ 39.76%	Est @ 28.45%	Est @ 20.54%	Est @ 15.00%	Est @ 11.12%	Est @ 8.40%	Est @ 6.50%	Est @ 5.17%
Present Value (TRY, Millions) Discounted @ 19%	-₺616	₺663	₺775	₺834	₺842	₺811	₺754	₺685	₺611	₺538

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₺5.9b

The second stage is also known as Terminal Value, this is the business's cash flow after 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 2.1%. We discount the terminal cash flows to today's value at a cost of equity of 19%.

Terminal Value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = ₺3.2b× (1 + 2.1%) ÷ (19%– 2.1%) = ₺19b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ₺19b÷ ( 1 + 19%)¹⁰= ₺3.2b

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is ₺9.1b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US$1.1, the company appears a touch undervalued at a 25% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

dcf

Important 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 these result, have a go at the calculation yourself and play with the 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 D-Market Elektronik Hizmetler ve Ticaret 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 19%, which is based on a levered beta of 1.011. 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 D-Market Elektronik Hizmetler ve Ticaret

Strength

• Debt is not viewed as a risk.

Weakness

• No major weaknesses identified for HEPS.

Opportunity

• Forecast to reduce losses next year.

• Has sufficient cash runway for more than 3 years based on current free cash flows.

• Good value based on P/S ratio and estimated fair value.

Threat

• Not expected to become profitable over the next 3 years.

Moving On:

Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. It's not possible to obtain a foolproof valuation with a DCF model. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Can we work out why the company is trading at a discount to intrinsic value? For D-Market Elektronik Hizmetler ve Ticaret, we've put together three additional items you should further examine:

1. Risks: Case in point, we've spotted 2 warning signs for D-Market Elektronik Hizmetler ve Ticaret you should be aware of.

2. Future Earnings: How does HEPS'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.

3. 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 NASDAQGS 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.

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