Does Nordisk Bergteknik AB (publ) (STO:NORB B) stock price in April reflect what it is really worth? Today we are going to estimate the intrinsic value of the stock by taking the expected future cash flows of the business and discounting them to the present value. We will use the Discounted Cash Flow (DCF) model for this purpose. Patterns like these may seem beyond a layman’s comprehension, but they’re pretty easy to follow.
Remember though that there are many ways to estimate the value of a business and a DCF is just one method. Anyone interested in learning a little more about intrinsic value should read the Simply Wall St.
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Is Nordisk Bergteknik correctly valued?
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. Wherever possible, we use analysts’ estimates, but where these are not available, we extrapolate the previous free cash flow (FCF) from the latest estimate or 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.
A DCF is based on the idea that a dollar in the future is worth less than a dollar today, and so the sum of these future cash flows is then discounted to today’s value:
10-Year Free Cash Flow (FCF) Forecast
2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | |
Leveraged FCF (SEK, millions) | 60.5 million kr | 118.5 million kr | 128.5 million kr | 135.3 million kr | 140.4 million kr | 144.3 million kr | 147.2 million kr | 149.5 million kr | 151.2 million kr | 152.5 million kr |
Growth rate estimate Source | Analyst x2 | Analyst x2 | Analyst x2 | Is at 5.3% | Is at 3.8% | Is at 2.75% | Is at 2.02% | Is at 1.51% | Is at 1.15% | Is at 0.9% |
Present value (SEK, million) discounted at 5.5% | 57.3kr | 106 kr | 109 kr | 109 kr | 107 kr | 105 kr | 101 kr | 97.3kr | 93.3kr | 89.2kr |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = 975 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. The Gordon Growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 0.3%. We discount terminal cash flows to present value at a cost of equity of 5.5%.
Terminal value (TV)= FCF_{2031} × (1 + g) ÷ (r – g) = kr153m × (1 + 0.3%) ÷ (5.5%– 0.3%) = kr2.9b
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= kr2.9b÷ ( 1 + 5.5%)^{ten}= kr1.7b
The total value, or equity value, is then the sum of the present value of future cash flows, which in this case is 2.7 billion kr. The final step is to divide the equity value by the number of shares outstanding. Compared to the current share price of 39.9 kr, the company appears to be about fair value at a 19% discount to the current share price. Remember though that this is only a rough estimate, and like any complex formula – trash in, trash out.
The hypotheses
The above calculation is highly dependent on two assumptions. One is the discount rate and the other is the cash flows. If you disagree with these results, try the math yourself and play around with the 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 consider Nordisk Bergteknik 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 takes debt into account. In this calculation, we used 5.5%, which is based on a leveraged beta of 1.227. 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 important, calculating DCF 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. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. If a company grows at a different pace, or if its cost of equity or risk-free rate changes sharply, output may be very different. For Nordisk Bergteknik, there are three relevant elements you should explore:
- Financial health: Does NORB B have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors such as leverage and risk.
- Future earnings: How does NORB B’s growth rate compare to its peers and the wider market? Dive deeper into the analyst consensus figure for the coming years by interacting with our free analyst growth forecast chart.
- 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!
PS. Simply Wall St updates its DCF calculation for every Swedish 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.