According to a recent analysis, Galp Energia SGPS may be undervalued by as much as 23%. The estimated fair value of the company is €18.34, while its current share price is €14.04. This suggests that there is potential for investors to gain a 34% return.
The valuation of Galp Energia SGPS is based on a two-stage discounted cash flow (DCF) model. This model takes into account two stages of growth, with the first stage being a higher growth period that levels off towards the terminal value in the second stage.
In the first stage, the cash flows to the business over the next ten years are estimated. Analyst estimates are used when available, but if not, extrapolation from previous free cash flow values is done. It is assumed that companies with shrinking free cash flow will slow their rate of shrinkage, while companies with growing free cash flow will see their growth rate slow over time.
The sum of these future cash flows is then discounted to arrive at a present value estimate. The Terminal Value, which accounts for all future cash flows after the ten-year period, is also calculated using the Gordon Growth formula. The discount rate used in the DCF model is 12%, which is based on the company’s cost of equity.
Based on the DCF model, the intrinsic value per share of Galp Energia SGPS is €15. Compared to the current share price of €14.04, this suggests that the company is slightly undervalued, with a 23% discount.
It is important to note that this valuation is a rough estimate, as it is based on certain assumptions. The discount rate and the actual cash flows are key inputs to the DCF model. Additionally, the model does not consider industry cyclicality or future capital requirements. Therefore, it should not be the sole basis for investment decision-making.
– Simply Wall St analysis model (for discounted cash flow calculation)
– Analyst estimates