Are Investors Undervaluing Cyfrowy Polsat S.A. (WSE:CPS) By 37%?

Key Insights

• Cyfrowy Polsat's estimated fair value is zł25.20 based on 2 Stage Free Cash Flow to Equity
• Current share price of zł15.93 suggests Cyfrowy Polsat is potentially 37% undervalued
• Analyst price target for CPS is zł16.73 which is 34% below our fair value estimate

In this article we are going to estimate the intrinsic value of Cyfrowy Polsat S.A. (WSE:CPS) by taking the expected future cash flows and discounting them to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. Believe it or not, it's not too difficult to follow, as you'll see from our example!

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

Trump has pledged to "unleash" American oil and gas and these 15 US stocks have developments that are poised to benefit.

What's The Estimated Valuation?

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 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 discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (PLN, Millions)	zł559.5m	zł1.59b	zł1.73b	zł2.10b	zł1.46b	zł1.48b	zł1.51b	zł1.56b	zł1.61b	zł1.67b
Growth Rate Estimate Source	Analyst x3	Analyst x2	Analyst x2	Analyst x2	Analyst x2	Est @ 1.24%	Est @ 2.21%	Est @ 2.89%	Est @ 3.37%	Est @ 3.70%
Present Value (PLN, Millions) Discounted @ 12%	zł500	zł1.3k	zł1.2k	zł1.3k	zł835	zł756	zł690	zł635	zł587	zł544

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = zł8.4b

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 (4.5%) 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 12%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = zł1.7b× (1 + 4.5%) ÷ (12%– 4.5%) = zł24b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= zł24b÷ ( 1 + 12%)¹⁰= zł7.7b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is zł16b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of zł15.9, the company appears quite undervalued at a 37% 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.

Important Assumptions

We would point out that 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 Cyfrowy Polsat 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 12%, which is based on a levered beta of 1.350. 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 Cyfrowy Polsat

SWOT Analysis for Cyfrowy Polsat

Next Steps:

Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize for a company. DCF models are not the be-all and end-all of investment valuation. 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. What is the reason for the share price sitting below the intrinsic value? For Cyfrowy Polsat, there are three important items you should assess:

1. Risks: Be aware that Cyfrowy Polsat is showing 1 warning sign in our investment analysis , you should know about...
2. Future Earnings: How does CPS'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 High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St updates its DCF calculation for every Polish 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.