The DCF model results in a price target of € 45 per share. Key model assumptions:
Top-line growth: We expect Fielmann AG to continue benefitting from structural growth. Hence our growth estimates for 2019-22E is in the range of 5% p.a. In the mid-term, we conservatively model approx. 5% The long-term growth rate is set at 3%.
EBIT margins: The scalable business model should allow for EBIT margins of 17% by 2022E, which look defendable given high competitive quality based on scale, geography and expertise. Accordingly, we model approx. 14% EBIT margins in the long-term.
WACC: We model a weighted average cost of capital of 7.5-8.0% to reflect the mature stage of the business model, consisting of a 5.0% risk premium beta of 1.0x and 3.5% risk free rate.
The adjusted Free Cash Flow Yield results in a fair value of € 32 per share based on 2021E and € 35 per share on 2022E. It thus supports the DCF based price target. Looking beyond 2021E i.e. half way 2021 and 2022 estimates seems justified considering that the full impact of the existing customers and highly likely customer wins will only be felt from 2021E onward.
Due to the fact that companies rarely bear sufficient resemblance to peers in terms of geographical exposure, size or competitive strength and in order to adjust for the pitfalls of weak long term visibility, an Adjusted Free Cash Flow analysis (Adjusted FCF) has been conducted.
The main driver of this model is the level of return available to a controlling investor, influenced by the cost of that investors’ capital (opportunity costs) and the purchase price – in this case the enterprise value of the company. Here, the adjusted FCF yield is used as a proxy for the required return and is defined as EBITDA less minority interest, taxes and investments required to maintain existing assets (maintenance capex).
Simply put, the model assumes that investors require companies to generate a minimum return on the investor’s purchase price. The required after tax return equals the model’s hurdle rate of 7.5%. Anything less suggests the stock is expensive; anything more suggests the stock is cheap.