Advertisement
New Zealand markets closed
  • NZX 50

    11,698.51
    -166.38 (-1.40%)
     
  • NZD/USD

    0.6124
    -0.0020 (-0.33%)
     
  • ALL ORDS

    7,943.60
    -31.20 (-0.39%)
     
  • OIL

    78.43
    -0.02 (-0.03%)
     
  • GOLD

    2,334.90
    -14.20 (-0.60%)
     

Wacker Chemie AG (ETR:WCH) Shares Could Be 26% Below Their Intrinsic Value Estimate

Key Insights

  • Wacker Chemie's estimated fair value is €146 based on 2 Stage Free Cash Flow to Equity

  • Wacker Chemie is estimated to be 26% undervalued based on current share price of €108

  • Analyst price target for WCH is €123 which is 15% below our fair value estimate

Today we will run through one way of estimating the intrinsic value of Wacker Chemie AG (ETR:WCH) by estimating the company's future cash flows and discounting them to their present value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. 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.

ADVERTISEMENT

Check out our latest analysis for Wacker Chemie

Step By Step Through The Calculation

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. 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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, 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

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

Levered FCF (€, Millions)

-€15.0m

€287.4m

€372.9m

€377.3m

€383.5m

€388.1m

€392.1m

€395.5m

€398.6m

€401.5m

Growth Rate Estimate Source

Analyst x2

Analyst x5

Analyst x6

Analyst x3

Analyst x2

Est @ 1.21%

Est @ 1.01%

Est @ 0.88%

Est @ 0.78%

Est @ 0.72%

Present Value (€, Millions) Discounted @ 5.5%

-€14.2

€258

€318

€305

€293

€282

€270

€258

€246

€235

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = €2.5b

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. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (0.6%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 5.5%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = €401m× (1 + 0.6%) ÷ (5.5%– 0.6%) = €8.2b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= €8.2b÷ ( 1 + 5.5%)10= €4.8b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is €7.2b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of €108, the company appears a touch undervalued at a 26% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

dcf
dcf

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Wacker Chemie 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 5.5%, which is based on a levered beta of 1.073. 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 Wacker Chemie

Strength

  • Debt is not viewed as a risk.

  • Dividend is in the top 25% of dividend payers in the market.

Weakness

  • Earnings declined over the past year.

Opportunity

  • Annual earnings are forecast to grow faster than the German market.

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

Threat

  • Dividends are not covered by cash flow.

  • Annual revenue is forecast to grow slower than the German market.

Looking Ahead:

Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. 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. Why is the intrinsic value higher than the current share price? For Wacker Chemie, we've put together three fundamental aspects you should explore:

  1. Risks: Be aware that Wacker Chemie is showing 2 warning signs in our investment analysis , you should know about...

  2. Future Earnings: How does WCH'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. Simply Wall St updates its DCF calculation for every German stock every day, so if you want to find the intrinsic value of any other stock 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.