Is Genmab A/S (CPH:GEN) Expensive For A Reason? A Look At The Intrinsic Value

January 27, 2019

In this article I am going to calculate the intrinsic value of Genmab A/S (CPH:GEN) by taking the expected future cash flows and discounting them to their present value. I will be using the discounted cash flows (DCF) model. It may sound complicated, but actually it is quite simple! Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. If you are reading this and its not January 2019 then I highly recommend you check out the latest calculation for Genmab by following the link below.

Check out our latest analysis for Genmab

What's the value?

I'm 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 perpetual stable growth rate. To start off with we need to estimate the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. The sum of these cash flows is then discounted to today's value.

5-year cash flow estimate

	2019	2020	2021	2022	2023
Levered FCF (DKK, Millions)	DKK1.60k	DKK2.14k	DKK2.41k	DKK3.34k	DKK4.12k
Source	Analyst x6	Analyst x5	Analyst x1	Analyst x1	Analyst x1
Present Value Discounted @ 8.04%	DKK1.48k	DKK1.83k	DKK1.91k	DKK2.45k	DKK2.80k

Present Value of 5-year Cash Flow (PVCF)= ø10b

After calculating the present value of future cash flows in the intial 5-year period we need to calculate the Terminal Value, which accounts for all the future cash flows beyond the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of the GDP. In this case I have used the 10-year government bond rate (0.2%). In the same way as with the 5-year 'growth' period, we discount this to today's value at a cost of equity of 8%.

Terminal Value (TV) = FCF₂₀₂₃ × (1 + g) ÷ (r – g) = ø4.1b × (1 + 0.2%) ÷ (8% – 0.2%) = ø53b

Present Value of Terminal Value (PVTV) = TV / (1 + r)⁵ = ø53b ÷ ( 1 + 8%)⁵ = ø36b

The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is ø46b. The last step is to then divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) then we use the equivalent number. This results in an intrinsic value of DKK753.19. Compared to the current share price of DKK950.6, the stock is fair value, maybe slightly overvalued and not available at a discount at this time.

CPSE:GEN Intrinsic Value Export January 28th 19

The 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 my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at Genmab as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I've used 8%, which is based on a levered beta of 0.800. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Next Steps:

Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For GEN, I've compiled three pertinent factors you should look at:

Financial Health: Does GEN 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.
Future Earnings: How does GEN'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.
Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of GEN? 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 does a DCF calculation for every DK stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article 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.