Is Genmab A/S (CPH:GMAB) Trading At A 50% Discount?

Key Insights

• The projected fair value for Genmab is kr.4,281 based on 2 Stage Free Cash Flow to Equity
• Current share price of kr.2,153 suggests Genmab is potentially 50% undervalued
• Analyst price target for GMAB is kr.2,752 which is 36% below our fair value estimate

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Genmab A/S (CPH:GMAB) as an investment opportunity 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. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

View our latest analysis for Genmab

The Calculation

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To begin with, we have to get estimates of 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, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (DKK, Millions)	kr.5.44b	kr.7.40b	kr.9.36b	kr.10.3b	kr.10.9b	kr.11.4b	kr.11.8b	kr.12.1b	kr.12.4b	kr.12.6b
Growth Rate Estimate Source	Analyst x7	Analyst x7	Analyst x4	Analyst x3	Est @ 6.25%	Est @ 4.57%	Est @ 3.40%	Est @ 2.58%	Est @ 2.00%	Est @ 1.60%
Present Value (DKK, Millions) Discounted @ 4.7%	kr.5.2k	kr.6.8k	kr.8.2k	kr.8.6k	kr.8.7k	kr.8.7k	kr.8.6k	kr.8.4k	kr.8.2k	kr.8.0k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = kr.79b

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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 (0.7%) 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 4.7%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = kr.13b× (1 + 0.7%) ÷ (4.7%– 0.7%) = kr.316b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= kr.316b÷ ( 1 + 4.7%)¹⁰= kr.200b

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.280b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of kr.2.2k, the company appears quite good value at a 50% 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.

The Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual 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 Genmab 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 4.7%, 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 Genmab

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. Why is the intrinsic value higher than the current share price? For Genmab, we've put together three fundamental elements you should look at:

1. Risks: For example, we've discovered 1 warning sign for Genmab that you should be aware of before investing here.
2. Future Earnings: How does GMAB'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 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.