Shares of public limited company Surgutneftegas (MCX: SNGS) could be 20% lower than their estimate of intrinsic value


Does Surgutneftegas Public Joint Stock Company (MCX: SNGS) share price for January reflect true value? Today we’re going to estimate the intrinsic value of the stock by taking expected future cash flows and discounting them to their present value. One way to do this is to use the Discounted Cash Flow (DCF) model. There really isn’t much to do, although it might seem quite complex.

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 flow, the rationale for this calculation can be read in detail in the Simply Wall St analysis model.

Check out our latest analysis for Surgutneftegas

Crunch the numbers

We use the 2-step growth model, which simply means that we take into account two stages of business growth. During the initial period, the business can have a higher growth rate, and the second stage is usually assumed to have a stable growth rate. To begin with, we need to get cash flow estimates for the next ten years. 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.

In general, we assume that a dollar today is worth more than a dollar in the future, 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) 222.5b 206.4b 195.1b 186.7b 185.0b ₽187.9b 194.1b 202.9b ₽213.8b ₽226.5b
Source of estimated growth rate Analyst x4 Analyst x4 Analyst x2 Analyst x2 Analyst x2 Is @ 1.59% East @ 3.31% East @ 4.51% East @ 5.36% Est @ 5.95%
Present value (RUB, millions) discounted at 15% 193.3k 155.9k 128.1k 106.5k 91.7k ₽81.0k ₽72.7k ₽66.1k 60.5k ₽55.7k

(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = 1.0t

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. 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 used the 5-year average of the 10-year government bond yield (7.3%) to estimate future growth. Similar to the 10-year “growth” period, we discount future cash flows to their present value, using a cost of equity of 15%.

Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = 226b × (1 + 7.3%) ÷ (15% – 7.3%) = ₽3.1t

Present value of terminal value (PVTV)= TV / (1 + r)ten= ₽3.1t ÷ (1 + 15%)ten= 773b

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 1.8 t. The last step is then to divide the equity value by the number of shares outstanding. From the current share price of 39.8, the company appears to be slightly undervalued at a 20% discount from the current share price. The assumptions in any calculation have a big impact on the valuation, so it’s best to take this as a rough estimate, not precise down to the last penny.

MISX Discounted Cash Flows: SNGS January 2, 2022

The hypotheses

Now, the most important inputs to a discounted cash flow are the discount rate and, of course, the actual cash flow. Part of investing is coming up with your own assessment of a company’s future performance, so try the math yourself and check your own assumptions. 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 view Surgutneftegas 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 debt into account. In this calculation, we used 15%, which is based on a leveraged beta of 1.242. Beta is a measure of the volatility of a stock relative to the market as a whole. We get our industry average beta from comparable companies globally, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Move on :

Valuation is only one side of the coin in terms of building your investment thesis, and ideally, it won’t be the only piece of analysis you look at for a business. DCF models are not the ultimate solution for investment valuation. Preferably, you would apply different cases and assumptions and see their impact on the valuation of the business. For example, if the terminal value growth rate is adjusted slightly, it can dramatically change the overall result. What is the reason why the stock price is below intrinsic value? For Surgutneftegas, we have put together three more aspects that you need to assess:

  1. Risks: For example, we discovered 1 warning sign for Surgutneftegas which you should know before investing here.
  2. Future benefits: How does SNGS ‘growth rate compare to that of its peers and the broader market? Dig deeper into the analyst consensus number 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 may not have considered!

PS. Simply Wall St updates its DCF calculation for every Russian stock every day, so if you want to find the intrinsic value of any other stock just search here.

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 any stock 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 any of the stocks mentioned.


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