Stock Analysis

Are Investors Undervaluing Forbo Holding AG (VTX:FORN) By 39%?

SWX:FORN

Key Insights

  • The projected fair value for Forbo Holding is CHF1,821 based on 2 Stage Free Cash Flow to Equity
  • Current share price of CHF1,114 suggests Forbo Holding is potentially 39% undervalued
  • Analyst price target for FORN is CHF1,410 which is 23% below our fair value estimate

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Forbo Holding AG (VTX:FORN) as an investment opportunity by projecting its future cash flows and then discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. 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 want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

See our latest analysis for Forbo Holding

Crunching The Numbers

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, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) forecast

2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
Levered FCF (CHF, Millions) CHF123.9m CHF130.5m CHF134.9m CHF138.1m CHF140.4m CHF142.0m CHF143.2m CHF144.0m CHF144.6m CHF145.0m
Growth Rate Estimate Source Analyst x2 Analyst x2 Est @ 3.37% Est @ 2.36% Est @ 1.66% Est @ 1.16% Est @ 0.82% Est @ 0.58% Est @ 0.41% Est @ 0.29%
Present Value (CHF, Millions) Discounted @ 5.5% CHF117 CHF117 CHF115 CHF111 CHF107 CHF103 CHF98.3 CHF93.7 CHF89.1 CHF84.7

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CHF1.0b

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. 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 (0.01%) 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 5.5%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = CHF145m× (1 + 0.01%) ÷ (5.5%– 0.01%) = CHF2.6b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CHF2.6b÷ ( 1 + 5.5%)10= CHF1.5b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is CHF2.6b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of CHF1.1k, the company appears quite undervalued at a 39% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

SWX:FORN Discounted Cash Flow August 18th 2023

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 Forbo 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 5.5%, which is based on a levered beta of 1.103. 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.

SWOT Analysis for Forbo Holding

Strength
  • Currently debt free.
  • Dividends are covered by earnings and cash flows.
Weakness
  • Earnings declined over the past year.
  • Dividend is low compared to the top 25% of dividend payers in the Building market.
Opportunity
  • Annual earnings are forecast to grow faster than the Swiss market.
  • Good value based on P/E ratio and estimated fair value.
Threat
  • Annual revenue is forecast to grow slower than the Swiss market.

Moving On:

Although the valuation of a company is important, it is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. What is the reason for the share price sitting below the intrinsic value? For Forbo Holding, we've put together three pertinent elements you should further examine:

  1. Financial Health: Does FORN have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
  2. Future Earnings: How does FORN'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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the SWX every day. If you want to find the calculation for other stocks just search here.

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Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.