Determining the Fair Value of Enel Generación Chile S.A.

Enel Generación Chile S.A. is estimated to have a fair value of CL$512. Currently priced at CL$416, it appears close to fair value, while its peers are trading at a premium of 190%. This analysis utilizes a two-stage DCF model to evaluate future cash flows, underscoring the importance of precise forecasting and considering market volatility.

This analysis seeks to determine the fair value of Enel Generación Chile S.A. using a two-stage Free Cash Flow (FCF) model. The estimated intrinsic value is CL$512, indicating that the current share price of CL$416 suggests the company is trading close to fair value. This performance is notable as Enel Generación Chile’s peers are averaging a significant premium of 190% in the market.

The discounted cash flow (DCF) model is employed to evaluate the company’s future cash flows. It values the company based on the present worth of anticipated cash flows over time, incorporating two growth phases: an initial higher growth period followed by a stable growth phase. Present cash flows from the first ten years are projected, while a conservative approach is taken for the terminal value growth rate, based on the average of the 10-year government bond yield.

The first stage’s cash flow forecast from 2025 to 2034 projects a decline in cash flow initially, stabilizing and then showing slight growth over the period. The present value of these cash flows totals CL$1.7 trillion. The terminal value calculation, using growth estimates and a discount rate of 9.9%, arrives at a total valuation of CL$4.2 trillion. Dividing this equity value by outstanding shares leads to a share price assessment aligning closely with the current market price.

Key assumptions include the importance of accurately estimating cash flows and discount rates, which remain vital components of the DCF. While the DCF offers valuable insights, it is not comprehensive; factors such as market cyclicality and future capital requirements must be taken into account. The selected beta of 0.805, derived from industry averages, reflects stock volatility in relation to the market.

A SWOT analysis identifies strengths such as stable dividends and strong cash flow coverage, while noting weaknesses like a decline in earnings. Opportunities exist with the current share price being below fair value, amidst potential threats being virtually absent. Investors are advised to consider additional factors alongside the DCF analysis, including the associated risks and the overall market context when assessing Enel Generación Chile’s stock potential. Simply Wall St updates its DCF calculations for every Chilean stock daily, providing easy access to intrinsic valuations.

In conclusion, the assessment of Enel Generación Chile S.A. reveals a fair value estimate of CL$512 against a current share price of CL$416, suggesting it is nearly fairly valued. The two-stage DCF model highlights the importance of precise financial inputs and considers growth dynamics. While the company’s strengths are apparent, investors should remain aware of earnings fluctuations and industry risks. As always, diversifying analytical approaches beyond DCF will strengthen investment decisions, allowing investors to explore better opportunities and manage potential drawbacks effectively.

Original Source: simplywall.st