Are Investors Undervaluing DSV A/S (CPH:DSV) By 33%?

Key Insights

• DSV's estimated fair value is kr.2,180 based on 2 Stage Free Cash Flow to Equity
• Current share price of kr.1,466 suggests DSV is potentially 33% undervalued
• Analyst price target for DSV is kr.1,683 which is 23% below our fair value estimate

In this article we are going to estimate the intrinsic value of DSV A/S (CPH:DSV) by estimating the company's future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!

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 DSV

Is DSV Fairly Valued?

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.

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) estimate

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (DKK, Millions)	kr.13.3b	kr.15.6b	kr.17.4b	kr.18.7b	kr.19.9b	kr.20.8b	kr.21.5b	kr.22.1b	kr.22.6b	kr.23.0b
Growth Rate Estimate Source	Analyst x3	Analyst x3	Est @ 10.95%	Est @ 8.01%	Est @ 5.96%	Est @ 4.52%	Est @ 3.51%	Est @ 2.81%	Est @ 2.31%	Est @ 1.97%
Present Value (DKK, Millions) Discounted @ 5.1%	kr.12.6k	kr.14.2k	kr.15.0k	kr.15.4k	kr.15.5k	kr.15.4k	kr.15.2k	kr.14.9k	kr.14.5k	kr.14.1k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = kr.147b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 1.2%. We discount the terminal cash flows to today's value at a cost of equity of 5.1%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = kr.23b× (1 + 1.2%) ÷ (5.1%– 1.2%) = kr.597b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= kr.597b÷ ( 1 + 5.1%)¹⁰= kr.365b

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.511b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of kr.1.5k, the company appears quite good value at a 33% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

Important Assumptions

We would point out that 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 DSV 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 5.1%, which is based on a levered beta of 0.947. 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 DSV

Next Steps:

Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize 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. Why is the intrinsic value higher than the current share price? For DSV, we've put together three important items you should look at:

1. Risks: You should be aware of the 1 warning sign for DSV we've uncovered before considering an investment in the company.
2. Future Earnings: How does DSV'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 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.

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.