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. In the first stage we need to estimate the cash flows to the business over the next five years. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount this to its value today and sum up the total to get the present value of these cash flows.
5-year cash flow forecast
|Levered FCF (€, Millions)||€-1.75||€1.55||€7.35||€11.00||€13.35|
|Source||Analyst x2||Analyst x2||Analyst x2||Analyst x2||Analyst x2|
|Present Value Discounted @ 8.16%||€-1.62||€1.33||€5.81||€8.04||€9.02|
Present Value of 5-year Cash Flow (PVCF)= €22.58m
The second stage is also known as Terminal Value, this is the business’s cash flow after 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 (0.8%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 8.2%.
Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = €13.35m × (1 + 0.8%) ÷ (8.2% – 0.8%) = €182.30m
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = €182.30m ÷ ( 1 + 8.2%)5 = €123.18m
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 €145.76m. 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 €6.13. Relative to the current share price of €6.76, the stock is fair value, maybe slightly overvalued at the time of writing.
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 Qt Group 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 0.800. 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.
Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company. For QTCOM, there are three essential factors you should further examine:
- Financial Health: Does QTCOM 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 QTCOM’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 QTCOM? 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 for every stock on the HEL every 6 hours. If you want to find the calculation for other stocks just search here.