SIAS SpA – Deutsche Bank “buy” recommendation and risk free rates
Normally I tend to ignore any sell side ratings for the stocks I am interested in.
However, this time with the Deutsche Bank “buy recommendation” for portfolio Stock SIAS (target 7,70 EUR) I find it interesting how they justify their valuation in the summary:
Our target price of E7.7 is based on an SoTP, which values each concession with an individual DCF based on an 8.5% WACC (5.5% risk-free, 5.0% risk premium and beta of 1.3x). We subtract net debt and provision and we then apply a 20% discount to reflect lower liquidity than peers and risk of value destructive M&A. Sias trades at a 30% discount to the European peers: 2012E EV/EBITDA is 4.5 (vs. 7x for the sector) and 2012E PE is 7.4x (10x). Downside risks are regulatory changes, more negative traffic performances, capex delays and value-destructive M&A (see page 32).
This is highly interesting. As I have written in an earlier post about risk free rates, the CAPM requires to use the default free risk free rate in the currency of the issuer.
It is difficult to determine an “undisturbed” risk free rate in the EURO anyway and maybe the 10 Year rate for Bunds at 1,46% is too low, but using 5.5% as a EUR risk free rate is defintiely wrong. Even more as the Bonds outstanding from SIAS yield 4.9 and 5.4%, which is below the assumed risk free rate.
In my opinion, the Deutsche Bank assumptions double counts the Italian risk because they use a high Beta and a “risky” rate to discount rate. Just as another interesting point: SIAS beta relative to the Italian FTSE MIB is only 0.8.
Nevertheless it is interesting, that even with double counting Italian risk they still end up with a price target of 7,70 EUR which would imply a 65% upside from the current 4.70 EUR.
This shows how undervalued some of the PIIGS shares are at the moment.