Today we are going to do a simple overview of a valuation method used to estimate the attractiveness of Movinn A/S (CPH:MOVINN) as an investment opportunity by taking cash flow expected futures and discounting them to the present value. We will use the Discounted Cash Flow (DCF) model for this purpose. Believe it or not, it’s not too hard to follow, as you’ll see in our example!
Businesses can be valued in many ways, which is why we emphasize that a DCF is not perfect for all situations. Anyone interested in learning a little more about intrinsic value should read the Simply Wall St.
Check out our latest analysis for Movinn
We use the 2-stage growth model, which simply means that we consider two stages of business growth. In the initial period, the company may have a higher growth rate, and the second stage is generally assumed to have a stable growth rate. To start, we need to estimate the cash flows for the next ten years. Since no analyst estimates of free cash flow are available to us, we have extrapolated the previous free cash flow (FCF) from the company’s latest reported value. We assume that companies with decreasing free cash flow will slow their rate of contraction and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow more in early years than in later years.
Generally, we assume that a dollar today is worth more than a dollar in the future, and so the sum of these future cash flows is then discounted to today’s value:
Estimated free cash flow (FCF) over 10 years
|Leveraged FCF (DKK, Millions)||7.84 million kr||7.91 million kr||7.96 million kr||8.00 kr||8.03 million kr||8.05 million kr||8.07 million kr||8.09 million kr||8.10 million kr||8.11 million kr|
|Growth rate estimate Source||Is at 1.23%||Is at 0.89%||Is at 0.65%||Is at 0.48%||Is at 0.36%||Is at 0.28%||Is at 0.22%||Is at 0.18%||Is at 0.16%||Is at 0.14%|
|Present value (DKK, million) discounted at 4.9%||7.5 kr||kr.7.2||6.9kr||6.6 kr||kr.6.3||kr.6.0||5.8kr||5.5 kr||kr.5.3||5.0 kr|
(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = 62 million kr
After calculating the present value of future cash flows over the initial 10-year period, we need to calculate the terminal value, which takes into account all future cash flows beyond the first stage. For a number of reasons, a very conservative growth rate is used which cannot exceed that of a country’s GDP growth. In this case, we used the 5-year average of the 10-year government bond yield (0.09%) to estimate future growth. Similar to the 10-year “growth” period, we discount future cash flows to present value, using a cost of equity of 4.9%.
Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = kr.8.1m × (1 + 0.09%) ÷ (4.9%– 0.09%) = kr.168m
Present value of terminal value (PVTV)= TV / (1 + r)ten= 168 million kr÷ ( 1 + 4.9%)ten= 104 million crowns
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is 166 million kr. The final step is to divide the equity value by the number of shares outstanding. Compared to the current share price of 8.0 kr, the company appears to be about fair value at a 19% discount to the current share price. Ratings are imprecise instruments, however, much like a telescope – move a few degrees and end up in another galaxy. Keep that in mind.
Now, the most important inputs to a discounted cash flow are the discount rate and, of course, the actual cash flows. Part of investing is coming up with your own assessment of a company’s future performance, so try the math yourself and check your own assumptions. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we view Movinn as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which factors in debt. In this calculation, we used 4.9%, which is based on a leveraged beta of 1.141. Beta is a measure of a stock’s volatility relative to the market as a whole. We derive our beta from the average industry beta of broadly comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
Let’s move on :
While a business valuation is important, it shouldn’t be the only metric to consider when researching a business. DCF models are not the be-all and end-all of investment valuation. Preferably, you would apply different cases and assumptions and see their impact on the valuation of the business. For example, changes in the company’s cost of equity or the risk-free rate can have a significant impact on the valuation. For Movinn, we have compiled three relevant aspects that you should consider:
- Risks: For example, we spotted 2 warning signs for Movinn you should be aware.
- Other high-quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality actions to get an idea of what you might be missing!
- Other environmentally friendly businesses: Are you concerned about the environment and do you think that consumers will buy more and more environmentally friendly products? Browse our interactive list of companies thinking about a greener future to discover actions you might not have thought of!
PS. Simply Wall St updates its DCF calculation for every Danish stock daily, so if you want to find the intrinsic value of any other stock, just search here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.