The Southern CompanySONYSE

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DCF Valuation

DCF Valuation Summary

Strong Buy

Fair Value: $166.09 per share(market-calibrated)

+70.8%

Upside to Fair Value

Current

$97.23

Pure Model

$181.22

Fair Value

$166.09

Bull Case

$226.66

Bear Case

$157.39

Market Reality Check

Model Terminal Growth

2.00%

Market-Implied Growth

0.50%

Calibrated Growth

1.48%

Fair value uses 65% model / 35% market-implied terminal growth. Pure model: $181.22.

What's Driving This Ratingfor SO

↓

CapEx normalizing toward maintenance

Historical CapEx is 31.54% of revenue (heavy investment phase). Model fades this to 5.00% by Year 10, freeing up ~$11.9B in annual FCF. This is the biggest driver of long-term cash flow improvement.

✓

Premium margins already priced in

EBIT margin of 25.05% is already well above sector average. The model holds this level — there's limited room for margin expansion to drive upside. Valuation depends primarily on revenue growth.

→

Moderate revenue growth

Analyst consensus projects 3.17% revenue growth, fading to 2.00% by Year 10. Revenue reaches $44.9B (vs $29.6B today).

↔

Perpetuity and exit methods disagree

Perpetuity growth gives $214.27/share (29.1x terminal FCF) while exit multiple gives $148.17/share (20.6x terminal FCF). The base case averages both methods.

🎯

Market pricing in lower growth than model

The market implies only 0.50% perpetual growth — 150bps below the model's 2.00%. This suggests the market sees headwinds or risks not in the model.

✓

Strong cash flow conversion

Year 10 FCF/EBITDA conversion of 77.84% indicates efficient cash generation. FCF reaches $14.5B by Year 10 (32.31% FCF margin).

Weighted Average Cost of Capital (WACC)

Cost of Equity (CAPM)

Risk-Free Rate (Rf)4.50%

Beta (β)0.45

Market Risk Premium4.50%

*Using current implied premium (4.5% per Damodaran 2026), not historical (6.5%)

Cost of Equity (Re)6.51%

Cost of Debt

Pre-tax Cost of Debt3.75%

Tax Rate16.56%

After-tax Cost of Debt3.13%

Equity Weight (E/V)61.97%

Debt Weight (D/V)38.03%

WACC Calculation

WACC = (E/V × Re) + (D/V × Rd × (1-Tc))

WACC = (61.97% × 6.51%) + (38.03% × 3.13%)

= 5.50%

10-Year Free Cash Flow Projections(showing years 1, 3, 5, 7, 10)

Year	Year 1	Year 3	Year 5	Year 7	Year 10
Revenue	$30.5B	$34.0B	$37.8B	$41.4B	$44.9B
EBIT	$7.6B	$8.5B	$9.5B	$10.4B	$11.2B
Tax	$1.3B	$1.4B	$1.6B	$1.7B	$1.9B
NOPAT	$6.4B	$7.1B	$7.9B	$8.6B	$9.4B
+ Depreciation	$5.0B	$5.6B	$6.2B	$6.8B	$7.4B
- Capex	$9.6B	$8.7B	$7.5B	$5.7B	$2.2B
- Δ NWC	$24M	$52M	$53M	$43M	$23M
Free Cash Flow	$1.7B	$3.9B	$6.6B	$9.7B	$14.5B
Discount Factor	0.948	0.852	0.765	0.687	0.585
Present Value	$1.7B	$3.4B	$5.1B	$6.7B	$8.5B

FCF Formula: Free Cash Flow = NOPAT + Depreciation - Capex - Change in Net Working Capital

Terminal Value Calculation

Perpetuity Growth Method

Year 10 FCF$14.5B

Terminal Growth Rate2.00%

WACC5.50%

TV = FCF₁₀ × (1+g) / (WACC-g)

Terminal Value$422.6B

PV of Terminal Value$247.4B

Exit Multiple Method

Year 10 EBITDA$18.6B

Exit Multiple (EV/EBITDA)16.0x

TV = EBITDA₁₀ × Exit Multiple

Terminal Value$298.1B

PV of Terminal Value$174.5B

Valuation Summary

Perpetuity Growth Method

PV of Projected FCFs$53.1B

PV of Terminal Value$247.4B

Enterprise Value$300.5B

(-) Net Debt$64.2B

Equity Value$236.3B

Shares Outstanding1.1B

Price per Share$214.27

Exit Multiple Method

PV of Projected FCFs$53.1B

PV of Terminal Value$174.5B

Enterprise Value$227.6B

(-) Net Debt$64.2B

Equity Value$163.4B

Shares Outstanding1.1B

Price per Share$148.17

Pure Model Fair Value

$181.22

Average of perpetuity growth and exit multiple methods (before market calibration)

Sensitivity AnalysisPrice per Share

WACC ↓ / Growth →	1.00%	1.50%	2.00%	2.50%	3.00%
3.50%	$280.68	$328.92	$312.62	$297.10	$282.31
4.50%	$202.31	$223.38	$252.87	$297.10	$282.31
5.50%	$155.44	$166.72	$181.22	$200.55	$227.62
6.50%	$123.31	$130.10	$138.38	$148.74	$162.06
7.50%	$99.43	$103.83	$109.02	$115.26	$122.88

How to read: This table shows how the valuation changes with different WACC (discount rate) and terminal growth rate assumptions. Green = undervalued, Red = overvalued.

Scenario Analysis

Bear Case

$157.39

61.9% vs current

• -25% vs analyst consensus
• Terminal growth: 2.0%
• Beta: 0.56

Base Case

$181.22

86.4% vs current

• Analyst consensus
• Terminal growth: 2.0%
• Beta: 0.45

Bull Case

$226.66

133.1% vs current

• +25% vs analyst consensus
• Terminal growth: 2.5%
• Beta: 0.38

Key Assumptions & Drivers✓ Using Analyst Consensus Estimates• Utilities Sector

Growth Assumptions (Select Years)

Year 1 Revenue Growth3.17%

Year 3 Revenue Growth6.29%

Year 5 Revenue Growth5.77%

Year 7 Revenue Growth4.26%

Year 10 Revenue Growth2.00%

Terminal Growth Rate2.00%

Margin & Efficiency

Current EBIT Margin25.05%

Tax Rate16.56%

Historical Capex / Rev31.54%

Terminal Capex / Rev5.00%

NWC / Revenue2.56%

Key Drivers: Revenue growth, operating margin expansion, capex efficiency, and working capital management are the primary drivers of cash flow generation. Terminal value assumptions significantly impact final valuation.

Institutional-Grade Methodology

Actual Company Data: Revenue, EBIT, Capex, NWC, Tax Rate, Interest Expense, Beta

Market Assumptions: Risk-free: 4.5% (10Y), MRP: 4.5% (Damodaran 2026), Exit: 16x EV/EBITDA (Utilities sector)

This DCF model is for informational purposes only. Projections are based on assumptions that may not materialize. Past performance does not guarantee future results. Consult a financial advisor before making investment decisions.

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