Vectron Systems AG

Vectron Systems AG
DCF Valuation
Our Discounted Cash Flow (DCF) model is based on the following assumptions:
Weighted average cost of capital (WACC): On basis of the current long-term
yields of German federal bonds, we set the risk-free rate at 3.5%. We assumed an
equity risk premium of 6.0%, and a debt risk premium of 2.50%. Although the
company´s stocks have been listed for a long period, we did not apply Vectron´s
historic beta in our WACC calculation. We decided to apply a beta of 1.50 which is
significantly above its historic value as well as the beta of most its peers. The
reason for this adjustment was mainly due to the company´s small size as well as
the cyclical characteristics of its underlying business with non-recurring revenues.
We furthermore assumed a long-term target equity ratio at market values of 70%,
which is rather a conservative assumption. These premises lead to a WACC of
9.99%
Phase 1 (2008-10E): We estimated the free cash flows (FCF) of phase 1 according
to our detailed financial forecasts for this period stated in the financials section. We
assume that 2008 and 2009 will be challenging as company´s revenues will be hit
by the global economic slowdown.
Phase 2 (2012-18E): For Phase 2, we made more general assumptions,
considering the expected industry growth and Vectron´s positioning. We believe
that Vectron will yield the fruits of its international business expansion once the
current recessive market environment has passed. From the mid-term growth
perspectives, we expect the company to monetise more strongly on hidden
potentials within its existing customer basis and to take advantage of the squeezeout
of small market players. Moreover, we assumed a stronger revenue
contribution from its international business as Vectron has sped up its international
expansion in 2008. Overall we allowed annual revenue growth to decrease
successively to 2.0% in 2018E, resulting in a CAGR 2012-18E of 5.2%. We
assumed that the company can reach an EBIT margin of 9.0%, a level which the
company originally aimed to achieve at the end of the fiscal year 2010.
Phase 3: For the calculation of the terminal value, we applied a long-term FCF
growth rate of 2.0% which equals the estimated long-term inflation rate. This
assumption theoretically corresponds to a real-term zero growth, since we use a
nominal discount rate (WACC).
Based on these assumptions, we calculated a fair value of the operating business
of EUR 37.4m. By deducting the company´s debt position the resulting fair value of
equity achieved EUR 38.5m. Overall, the fair value per share amounts to EUR
25.68.
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Assumptions:
WACC of 9.99%
Phase 1: Detailed
financial forecasts
Phase 2: decreasing
revenue growth
Phase 3: 2% growth for
terminal value
Our DCF yield in a fair
value per share of
25.68
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