NTG Nordic Transport Group A/S (CPH:NTG) Shares Could Be 45% Below Their Intrinsic Value Estimate

Key Insights

• The projected fair value for NTG Nordic Transport Group is kr.685 based on 2 Stage Free Cash Flow to Equity
• NTG Nordic Transport Group is estimated to be 45% undervalued based on current share price of kr.374
• Analyst price target for NTG is kr.441 which is 36% below our fair value estimate

Does the September share price for NTG Nordic Transport Group A/S (CPH:NTG) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the expected future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

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. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

View our latest analysis for NTG Nordic Transport Group

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 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.

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

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (DKK, Millions)	kr.632.0m	kr.751.7m	kr.766.1m	kr.777.6m	kr.787.1m	kr.795.1m	kr.802.0m	kr.808.2m	kr.813.9m	kr.819.2m
Growth Rate Estimate Source	Analyst x3	Analyst x3	Est @ 1.92%	Est @ 1.51%	Est @ 1.22%	Est @ 1.01%	Est @ 0.87%	Est @ 0.77%	Est @ 0.70%	Est @ 0.65%
Present Value (DKK, Millions) Discounted @ 5.8%	kr.597	kr.672	kr.647	kr.621	kr.594	kr.567	kr.541	kr.515	kr.490	kr.466

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = kr.5.7b

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 0.5%. We discount the terminal cash flows to today's value at a cost of equity of 5.8%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = kr.819m× (1 + 0.5%) ÷ (5.8%– 0.5%) = kr.16b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= kr.16b÷ ( 1 + 5.8%)¹⁰= kr.8.9b

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.15b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of kr.374, the company appears quite undervalued at a 45% 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.

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 NTG Nordic Transport Group 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 5.8%, which is based on a levered beta of 1.052. 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 NTG Nordic Transport Group

Next Steps:

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 example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Why is the intrinsic value higher than the current share price? For NTG Nordic Transport Group, there are three pertinent items you should assess:

1. Risks: For example, we've discovered 2 warning signs for NTG Nordic Transport Group that you should be aware of before investing here.
2. Future Earnings: How does NTG'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.

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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.