Calculating The Intrinsic Value Of Burkhalter Holding AG (VTX:BRKN)

Key Insights

• Burkhalter Holding's estimated fair value is CHF115 based on 2 Stage Free Cash Flow to Equity
• With CHF94.60 share price, Burkhalter Holding appears to be trading close to its estimated fair value
• Industry average discount to fair value of 9.8% suggests Burkhalter Holding's peers are currently trading at a lower discount

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Burkhalter Holding AG (VTX:BRKN) as an investment opportunity by taking the expected future cash flows and discounting them to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. There's really not all that much to it, even though it might appear quite complex.

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

See our latest analysis for Burkhalter Holding

Step By Step Through The Calculation

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (CHF, Millions)	CHF54.3m	CHF56.9m	CHF58.8m	CHF59.5m	CHF60.0m	CHF60.4m	CHF60.7m	CHF61.0m	CHF61.2m	CHF61.4m
Growth Rate Estimate Source	Analyst x1	Analyst x1	Analyst x1	Est @ 1.15%	Est @ 0.86%	Est @ 0.66%	Est @ 0.52%	Est @ 0.42%	Est @ 0.35%	Est @ 0.30%
Present Value (CHF, Millions) Discounted @ 5.1%	CHF51.6	CHF51.5	CHF50.7	CHF48.8	CHF46.8	CHF44.9	CHF42.9	CHF41.0	CHF39.2	CHF37.4

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CHF455m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (0.2%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 5.1%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = CHF61m× (1 + 0.2%) ÷ (5.1%– 0.2%) = CHF1.3b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CHF1.3b÷ ( 1 + 5.1%)¹⁰= CHF765m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is CHF1.2b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of CHF94.6, the company appears about fair value at a 18% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

Important Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Burkhalter Holding 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 accounts for debt. In this calculation we've used 5.1%, which is based on a levered beta of 1.065. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Moving On:

Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. It's not possible to obtain a foolproof valuation with a DCF model. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Burkhalter Holding, we've put together three fundamental factors you should consider:

1. Risks: Case in point, we've spotted 1 warning sign for Burkhalter Holding you should be aware of.
2. Future Earnings: How does BRKN's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
3. Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St updates its DCF calculation for every Swiss stock every day, so if you want to find the intrinsic value of any other stock just search here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.