Yesterday I posted about Thales and Rheinmetall. I found these companies interesting for reasons I mentioned in the post. This morning I got up early to do a DCF valuation.
In this case, I only did the calculations for Thales in this case. $HO (-0.85%) For anyone who is interested, I will give you an insight into my calculations. First of all, I would like to mention that my calculations were made for the next five years.
The following figures are taken directly from the Thales 2023 financial report.
STEP 1: I used it to calculate the projected free cash flow.
- Free operating cash flow: 2.026 million.
- Expected organic sales growth for 2024: +4% to +6%. We use a conservative growth rate of 5% for our forecasts.
- I assume that a similar growth rate will apply for the next five years.
- For 2028, I have calculated a growth rate of 4% to take into account a possible slowdown in growth. I have done this to minimize the risk of overvaluing the company.
STEP 2Then I calculated the Terminal Value (TV) based on the Gordon Growth model.
STEP 3: For this I needed the WACC.
The following assumptions were made:
- Cost of Equity (Re): 8% (typical for moderate risk companies).
- Cost of Debt (Rd): 4% (taking into account current debt levels and interest rates).
- Equity ratio: 63.5% (equity/total capital).
- Debt ratio: 36.5% (debt/total capital).
I have calculated a WACC of 6.14 %.
STEP 4Discounting the cash flows and the terminal value to the present value (PV)
We know that the terminal value is 62,823.57 million.
The present value can be calculated by dividing the terminal value by (1 + WACC)^5 (five years into the future).
This results in a value of EUR 46,577.52 million.
STEP 5Total present value (TPV) and fair value per share.
By calculating the sum of the present values, we obtain the total present value (TPV): 55,484.52 million.
Now to the climax!
We can finally calculate a fair value per share by dividing the TPV by the number of shares outstanding.
There are about 215 million shares outstanding.
55.484,52 / 215 = 258,04.
This is the share price I calculated for Thales and should also be the fair value per share, using the conservative growth rates of 5% for the next five years.
With a current share price of just under € 147, I think this share is undervalued and have therefore placed a buy order with my broker. I note that a five-year period is also linked to the European elections (every five years) and the points I mentioned in my earlier post about increasing military budgets.
Thank you very much for reading!
