Does Unlimited Travel Group UTG AB (publ) (STO:UTG) stock price in March reflect what it is really worth? Today we are going to estimate the intrinsic value of the stock by projecting its future cash flows and then discounting them to the present value. This will be done using the discounted cash flow (DCF) model. Believe it or not, it’s not too hard to follow, as you’ll see in our example!
We generally believe that the value of a company is the present value of all the cash it will generate in the future. However, a DCF is just one of many evaluation metrics, and it is not without its flaws. If you want to know more about discounted cash flow, the rationale for this calculation can be read in detail in the Simply Wall St analysis template.
Check out our latest analysis for Unlimited Travel Group UTG
Is Unlimited Travel Group UTG Fairly Valued?
We will use a two-stage DCF model which, as the name suggests, takes into account two stages of growth. The first stage is usually a period of higher growth which stabilizes towards the terminal value, captured in the second period of “sustained growth”. To begin with, we need to obtain cash flow estimates for the next ten years. Since no analyst estimate of free cash flow is available, 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.
A DCF is based on the idea that a dollar in the future is worth less than a dollar today, so we need to discount the sum of these future cash flows to arrive at an estimate of present value:
Estimated free cash flow (FCF) over 10 years
|Leveraged FCF (SEK, millions)||kr8.74m||8.04 million kr||7.59 million kr||kr7.31m||7.12 million kr||kr7.00m||kr6.92m||kr6.88m||kr6.85m||kr6.84m|
|Growth rate estimate Source||Is @ -11.63%||Is @ -8.05%||East @ -5.54%||Is @ -3.78%||East @ -2.56%||Is @ -1.7%||Is @ -1.09%||Is @ -0.67%||Is @ -0.38%||East @ -0.17%|
|Present value (SEK, million) discounted at 6.1%||kr8.2||kr7.1||kr6.4||5.8kr||kr5.3||4.9kr||4.6kr||kr4.3||4.0kr||3.8kr|
(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = 54 million kr
We now need to calculate the terminal value, which represents all future cash flows after this ten-year period. 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 (0.3%) 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 6.1%.
Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = kr6.8m × (1 + 0.3%) ÷ (6.1%– 0.3%) = kr119m
Present value of terminal value (PVTV)= TV / (1 + r)ten= 119 million kr÷ ( 1 + 6.1%)ten= 66 million kr
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is 120 million kr. To get the intrinsic value per share, we divide it by the total number of shares outstanding. Compared to the current share price of 10.3 kr, the company appears around fair value at the time of writing. Ratings are imprecise instruments, however, much like a telescope – move a few degrees and end up in a different 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. 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 Unlimited Travel Group UTG 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 6.1%, which is based on a leveraged beta of 1.356. 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.
While a business valuation is important, it shouldn’t be the only metric to consider when researching a business. It is not possible to obtain an infallible valuation with a DCF model. Preferably, you would apply different cases and assumptions and see their impact on the valuation of the business. 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 Unlimited Travel Group UTG, we’ve put together three relevant things you should dig into:
- Risks: Take for example the ubiquitous specter of investment risk. We have identified 4 warning signs with Unlimited Travel Group UTG (at least 2 that make us uncomfortable), and understanding them should be part of your investment process.
- 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. The Simply Wall St app performs an updated cash flow valuation for every stock on OM every day. If you want to find the calculation for other stocks, 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.