An Intrinsic Calculation For Royal Unibrew A/S (CPH:RBREW) Suggests It's 48% Undervalued

By
Simply Wall St
Published
April 21, 2022
CPSE:RBREW
Source: Shutterstock

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Royal Unibrew A/S (CPH:RBREW) as an investment opportunity by projecting its future cash flows and then discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. There's really not all that much to it, even though it might appear quite complex.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

See our latest analysis for Royal Unibrew

Step by step through the calculation

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. 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.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Levered FCF (DKK, Millions) kr.1.46b kr.1.60b kr.1.78b kr.1.88b kr.1.96b kr.2.01b kr.2.05b kr.2.08b kr.2.11b kr.2.12b
Growth Rate Estimate Source Analyst x6 Analyst x6 Analyst x5 Est @ 5.81% Est @ 4.1% Est @ 2.89% Est @ 2.05% Est @ 1.46% Est @ 1.05% Est @ 0.76%
Present Value (DKK, Millions) Discounted @ 3.5% kr.1.4k kr.1.5k kr.1.6k kr.1.6k kr.1.6k kr.1.6k kr.1.6k kr.1.6k kr.1.5k kr.1.5k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = kr.16b

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 0.09%. We discount the terminal cash flows to today's value at a cost of equity of 3.5%.

Terminal Value (TV)= FCF2031 × (1 + g) ÷ (r – g) = kr.2.1b× (1 + 0.09%) ÷ (3.5%– 0.09%) = kr.61b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= kr.61b÷ ( 1 + 3.5%)10= kr.43b

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is kr.59b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of kr.647, the company appears quite good value at a 48% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf
CPSE:RBREW Discounted Cash Flow April 21st 2022

The assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 Royal Unibrew 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 3.5%, which is based on a levered beta of 0.814. 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.

Next Steps:

Whilst important, the DCF calculation is only one of many factors that you need to assess for 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 instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Can we work out why the company is trading at a discount to intrinsic value? For Royal Unibrew, we've compiled three important elements you should further examine:

  1. Risks: Every company has them, and we've spotted 3 warning signs for Royal Unibrew you should know about.
  2. Future Earnings: How does RBREW'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 Danish stock every day, so if you want to find the intrinsic value of any other stock just search here.

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