Estimating The Intrinsic Value Of Aktieselskabet Schouw & Co. (CPH:SCHO)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Aktieselskabet Schouw fair value estimate is kr.680
• Aktieselskabet Schouw's kr.561 share price indicates it is trading at similar levels as its fair value estimate

How far off is Aktieselskabet Schouw & Co. (CPH:SCHO) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. 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 Aktieselskabet Schouw

What's The Estimated Valuation?

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.

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

	2023	2024	2025	2026	2027	2028	2029	2030	2031	2032
Levered FCF (DKK, Millions)	kr.365.0m	kr.961.0m	kr.892.0m	kr.850.3m	kr.823.5m	kr.806.4m	kr.795.6m	kr.789.1m	kr.785.6m	kr.784.2m
Growth Rate Estimate Source	Analyst x1	Analyst x1	Analyst x1	Est @ -4.68%	Est @ -3.15%	Est @ -2.08%	Est @ -1.33%	Est @ -0.81%	Est @ -0.44%	Est @ -0.19%
Present Value (DKK, Millions) Discounted @ 5.2%	kr.347	kr.869	kr.767	kr.695	kr.640	kr.596	kr.559	kr.528	kr.499	kr.474

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = kr.6.0b

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 0.4%. We discount the terminal cash flows to today's value at a cost of equity of 5.2%.

Terminal Value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = kr.784m× (1 + 0.4%) ÷ (5.2%– 0.4%) = kr.17b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= kr.17b÷ ( 1 + 5.2%)¹⁰= kr.10b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is kr.16b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of kr.561, the company appears about fair value at a 17% 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.

Important 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 Aktieselskabet Schouw 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 5.2%, which is based on a levered beta of 0.800. 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 Aktieselskabet Schouw

Moving On:

Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. 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. For Aktieselskabet Schouw, we've compiled three fundamental items you should further research:

1. Risks: Take risks, for example - Aktieselskabet Schouw has 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.
2. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for SCHO's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
3. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the CPSE every day. If you want to find the calculation for other stocks 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.