Calculating The Intrinsic Value Of SC Dorna Turism SA (BVB:DOIS)

Key Insights

• The projected fair value for SC Dorna Turism is RON4.75 based on 2 Stage Free Cash Flow to Equity
• Current share price of RON4.80 suggests SC Dorna Turism is potentially trading close to its fair value
• Industry average of 253% suggests SC Dorna Turism's peers are currently trading at a higher premium to fair value

Does the January share price for SC Dorna Turism SA (BVB:DOIS) reflect what it's really worth? Today, we will estimate the stock's intrinsic value 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.

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. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

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What's The Estimated Valuation?

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. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last 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

	2026	2027	2028	2029	2030	2031	2032	2033	2034	2035
Levered FCF (RON, Millions)	RON533.7k	RON575.2k	RON617.7k	RON661.6k	RON707.3k	RON755.3k	RON805.7k	RON859.0k	RON915.5k	RON975.3k
Growth Rate Estimate Source	Est @ 8.34%	Est @ 7.78%	Est @ 7.38%	Est @ 7.11%	Est @ 6.91%	Est @ 6.78%	Est @ 6.68%	Est @ 6.62%	Est @ 6.57%	Est @ 6.54%
Present Value (RON, Millions) Discounted @ 15%	RON0.5	RON0.4	RON0.4	RON0.4	RON0.4	RON0.3	RON0.3	RON0.3	RON0.3	RON0.2

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = RON3.5m

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 (6.5%) 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 15%.

Terminal Value (TV)= FCF₂₀₃₅ × (1 + g) ÷ (r – g) = RON975k× (1 + 6.5%) ÷ (15%– 6.5%) = RON13m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= RON13m÷ ( 1 + 15%)¹⁰= RON3.3m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is RON6.8m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of RON4.8, the company appears around fair value at the time of writing. 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.

Important Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 SC Dorna Turism 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 15%, which is based on a levered beta of 1.093. 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.

See our latest analysis for SC Dorna Turism

Next Steps:

Although the valuation of a company is important, it shouldn't be the only metric you look at when researching 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. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For SC Dorna Turism, there are three essential factors you should assess:

1. Risks: Be aware that SC Dorna Turism is showing 3 warning signs in our investment analysis , and 2 of those are a bit concerning...
2. 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!
3. Other Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the BVB every day. If you want to find the calculation for other stocks just search here.

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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.