Does This Valuation Of RATIONAL Aktiengesellschaft (ETR:RAA) Imply Investors Are Overpaying?

In This Article:

Key Insights

  • RATIONAL's estimated fair value is €616 based on 2 Stage Free Cash Flow to Equity

  • RATIONAL is estimated to be 23% overvalued based on current share price of €759

  • Our fair value estimate is 16% lower than RATIONAL's analyst price target of €736

How far off is RATIONAL Aktiengesellschaft (ETR:RAA) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by projecting its future cash flows and then discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. There's really not all that much to it, even though it might appear quite complex.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

View our latest analysis for RATIONAL

The Model

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. 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 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 (€, Millions)

€227.0m

€252.3m

€265.9m

€295.8m

€313.9m

€328.0m

€339.0m

€347.6m

€354.5m

€360.2m

Growth Rate Estimate Source

Analyst x9

Analyst x8

Analyst x3

Analyst x1

Est @ 6.12%

Est @ 4.49%

Est @ 3.35%

Est @ 2.55%

Est @ 1.99%

Est @ 1.60%

Present Value (€, Millions) Discounted @ 5.3%

€216

€228

€228

€241

€243

€241

€236

€230

€223

€215

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = €2.3b

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 (0.7%) 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 5.3%.