PSI Software SE (ETR: PSAN) Shares can be 34% under their intrinsic value estimate

The second phase is also known as terminal value, this is the cash flow of the company after the first phase. For a number of reasons, a very conservative growth rate is used that is no greater than that of the GDP growth of a country. In this case we used the 5-year average of the 10-year return of the government bonds (1.3%) to estimate future growth. In the same way as with the 10-year ‘growth period, we consider future cash flows to the value of today, with the help of equity of 6.4%.

Terminal value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (R – G) = € 45m × (1 + 1.3%) ÷ (6.4% – 1.3%) = € 890m

Current value of terminal value (PVTV)= TV / (1 + R)¹⁰= € 890m ÷ (1 + 6.4%)¹⁰= € 479M

The total value, or stock value, is then the sum of the present value of the future cash flows, which in this case is € 687 million. In the last step we divide the share value through the number of outstanding shares. Compared to the current share price of € 29.3, the company seems to be quite undervalued with a discount of 34% to where the stock price is currently trading. However, do not forget that this is only an estimated appreciation, and like any complex formula – waste in it, waste out.

We would point out that the most important input for a discount with a discount is the disconeration foot and of course the actual cash flows. If you do not agree with this result, try the calculation yourself and play with the assumptions. The DCF also does not take into account the possible cyclicity of an industry, or the future capital requirements of a company, so it does not give a complete picture of the potential performance of a company. Since we regard PSI software as potential shareholders, the costs of equity are used as the disconeration rate, instead of the capital costs (or weighted average capital costs, WACC) that are debts. In this calculation we have used 6.4%, which is based on a delivered beta of 1,182. Beta is a measure of the volatility of a share compared to the market as a whole. We get our beta from the sector average beta from worldwide comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable reach for a stable company.

See our latest analysis for PSI software

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Although the appreciation of a company is important, this should not be the only statistics that you look at when investigating a company. It is not possible to obtain a watertight rating with a DCF model. It should be seen earlier as a guide for “what assumptions should be true that this stock is under/overvalued?” If a company with a different rate grows, or if the costs of equity or risk -free speed changes considerably, the output can look very different. Can we find out why the company acts with a discount on intrinsic value? For PSI software we have compiled three fundamental items that you must investigate further:

1. Financial health: Does Psan have a healthy balance? View our free balance analysis with six simple checks on important factors such as leverage and risk.

2. Future income: How does Psan’s growth rate relate to his colleagues and the wider market? Dig deeper into the consensus number of the analysts for the coming years by interacting with our free analyst -ware chart.

3. Other solid companies: Low debts, a high return on equity and good performance from the past are fundamentally for a strong company. Why not explore our interactive list of shares with solid business fundamentals to see if there are other companies that you may not have considered!

Ps. The simply Wall ST -app performs a discount in cash with a discount every day for every stock on the Xtra. If you want to find the calculation for other shares, just search here.

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