Calculation of the intrinsic value of the Segezha Public Joint Stock Company (MCX: SGZH) group of companies

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In this article, we will estimate the intrinsic value of the Segezha Public Joint Stock Company (MCX: SGZH) group of companies by estimating the company’s future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model on this occasion. It may sound complicated, but it’s actually quite simple!

We draw your attention to the fact that there are many ways to assess a business and, like DCF, each technique has advantages and disadvantages in certain scenarios. If you want to know more about discounted cash flows, the rationale for this calculation can be read in detail in the Simply Wall St analysis model.

See our latest analysis for the Segezha group of companies

The model

We are going to use a two-step DCF model, which, as the name suggests, takes into account two stages of growth. The first stage is usually a period of higher growth which stabilizes towards the terminal value, captured in the second period of “steady growth”. To begin with, we need to estimate the next ten years of cash flow. Where possible, we use analyst estimates, but when these are not available, we extrapolate the previous free cash flow (FCF) from the last estimate or stated value. We assume that companies with decreasing free cash flow will slow their rate of contraction, and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow down more in the early years than in subsequent years.

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

10-year Free Cash Flow (FCF) estimate

2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Leverage FCF (RUB, Millions) ₽7.19b 8.16b ₽13.6b ₽20.0b ₽25.3b ₽30.5b ₽35.6b ₽40.6b 45.5b ₽50.4b
Source of estimated growth rate Analyst x5 Analyst x5 Analyst x4 Analyst x3 Is 26.53% Is 20.8% Is 16.79% Is 13.99% Est @ 12.02% Est @ 10.65%
Present value (RUB, millions) discounted at 21% 6.0k ₽5.6k ₽7.7k ₽9.4k ₽9.8k ₽9.8k ₽9.5k 9.0k ₽8.3k ₽7.6k

(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = ₽83b

After calculating the present value of future cash flows over the initial 10 year period, we need to calculate the terminal value, which takes into account all future cash flows beyond the first step. The Gordon growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 7.4%. We discount the terminal cash flows to their present value at a cost of equity of 21%.

Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = ₽50b × (1 + 7.4%) ÷ (21% – 7.4%) = ₽405b

Present value of terminal value (PVTV)= TV / (1 + r)ten= ₽405b ÷ (1 + 21%)ten= 61b

The total value is the sum of the cash flows for the next ten years plus the present terminal value, which gives the total value of equity, which in this case is ₽144b. To get the intrinsic value per share, we divide it by the total number of shares outstanding. From the current stock price of 7.5, the company is shown at fair value at a discount of 18% from the current stock price. Ratings are imprecise instruments, however, much like a telescope – move a few degrees and end up in another galaxy. Keep this in mind.

MISX Discounted Cash Flows: SGZH August 24, 2021

Important assumptions

The above calculation is very dependent on two assumptions. One is the discount rate and the other is cash flow. You don’t have to agree with these entries, I recommend that you redo the calculations yourself and play with them. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a full picture of a company’s potential performance. Since we consider the Segezha group of companies 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 takes into account debt. In this calculation, we used 21%, which is based on a leveraged beta of 1.948. Beta is a measure of the volatility of a stock relative to the market as a whole. We get our beta from the industry average beta from globally comparable companies, with a limit imposed between 0.8 and 2.0, which is a reasonable range for a stable business.

Next steps:

Valuation is only one side of the coin in terms of building your investment thesis, and it’s just one of the many factors you need to evaluate for a business. DCF models are not the alpha and omega of investment valuation. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under / overvalued?” For example, changes in the company’s cost of equity or the risk-free rate can have a significant impact on valuation. For the Segezha group of companies, we’ve compiled three more things you should consider:

  1. Risks: Take risks, for example – Segezha group of companies has 1 warning sign we think you should be aware.
  2. Future benefits: How does SGZH’s growth rate compare to that of its peers and the broader market? Dig deeper into the analyst consensus count for years to come by interacting with our free analyst growth expectations chart.
  3. Other strong companies: 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 trading fundamentals to see if there are other companies you might not have considered!

PS. The Simply Wall St app performs a daily discounted cash flow assessment for each MISX share. If you want to find the calculation for other actions, just search here.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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