Is PIHLIS fairly valued?
I use what is known as a 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the first stage is higher growth, and the second stage is a more stable growth phase. 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
|Levered FCF (€, Millions)||€-33.00||€18.60||€27.30||€29.15||€33.15|
|Source||Analyst x3||Analyst x4||Analyst x4||Analyst x2||Analyst x2|
|Present Value Discounted @ 8.23%||€-30.49||€15.88||€21.54||€21.25||€22.32|
Present Value of 5-year Cash Flow (PVCF)= €50
We now need to calculate the Terminal Value, which accounts for all the future cash flows after the five years. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 0.8%. We discount this to today’s value at a cost of equity of 8.2%.
Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = €33 × (1 + 0.8%) ÷ (8.2% – 0.8%) = €448
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = €448 / ( 1 + 8.2%)5 = €302
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 €352. 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 €15.58, which, compared to the current share price of €11.5, we see that Pihlajalinna Oyj is about right, perhaps slightly undervalued at a 26.18% discount to what it is available for right now.
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 my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Pihlajalinna Oyj 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 8.2%, which is based on a levered beta of 0.808. 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.
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 PIHLIS, I’ve put together three pertinent factors you should further examine:
- Financial Health: Does PIHLIS 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 PIHLIS’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 PIHLIS? 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 FI stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.