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ZEAL Network SE's (ETR:TIMA) Intrinsic Value Is Potentially 75% Above Its Share Price

Key Insights

  • The projected fair value for ZEAL Network is €62.61 based on 2 Stage Free Cash Flow to Equity

  • ZEAL Network's €35.80 share price signals that it might be 43% undervalued

  • Analyst price target for TIMA is €47.13 which is 25% below our fair value estimate

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of ZEAL Network SE (ETR:TIMA) as an investment opportunity by taking the expected future cash flows and discounting them to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.

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. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

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See our latest analysis for ZEAL Network

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. In the first stage we need to estimate the cash flows to the business over the next ten years. 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 need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) estimate

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

Levered FCF (€, Millions)

€22.8m

€35.7m

€47.2m

€55.8m

€63.0m

€68.8m

€73.4m

€77.0m

€79.7m

€81.9m

Growth Rate Estimate Source

Analyst x3

Analyst x3

Analyst x3

Est @ 18.13%

Est @ 12.89%

Est @ 9.23%

Est @ 6.66%

Est @ 4.87%

Est @ 3.61%

Est @ 2.73%

Present Value (€, Millions) Discounted @ 5.8%

€21.5

€31.9

€39.9

€44.6

€47.6

€49.2

€49.6

€49.2

€48.2

€46.8

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = €428m

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. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 0.7%. We discount the terminal cash flows to today's value at a cost of equity of 5.8%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = €82m× (1 + 0.7%) ÷ (5.8%– 0.7%) = €1.6b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= €1.6b÷ ( 1 + 5.8%)10= €928m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is €1.4b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of €35.8, the company appears quite undervalued at a 43% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

dcf
dcf

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. 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 ZEAL Network 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 5.8%, which is based on a levered beta of 1.104. 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 ZEAL Network

Strength

  • Earnings growth over the past year exceeded its 5-year average.

  • Debt is not viewed as a risk.

Weakness

  • Earnings growth over the past year underperformed the Hospitality industry.

  • Dividend is low compared to the top 25% of dividend payers in the Hospitality market.

Opportunity

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

  • Trading below our estimate of fair value by more than 20%.

Threat

  • Dividends are not covered by cash flow.

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

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. 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. 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. Can we work out why the company is trading at a discount to intrinsic value? For ZEAL Network, we've compiled three pertinent factors you should look at:

  1. Risks: As an example, we've found 1 warning sign for ZEAL Network that you need to consider before investing here.

  2. Future Earnings: How does TIMA'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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the XTRA every day. If you want to find the calculation for other stocks 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.