Is Koninklijke DSM N.V. (AMS:DSM) Expensive For A Reason? A Look At The Intrinsic Value

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Today I will be providing a simple run through of a valuation method used to estimate the attractiveness of Koninklijke DSM N.V. (AMS:DSM) as an investment opportunity by projecting its future cash flows and then discounting them to today’s value. I will be using the Discounted Cash Flows (DCF) model. It may sound complicated, but actually it is quite simple! If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model. If you are reading this and its not February 2019 then I highly recommend you check out the latest calculation for Koninklijke DSM by following the link below.

See our latest analysis for Koninklijke DSM

The calculation

I’m 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 perpetual stable growth rate. 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. The sum of these cash flows is then discounted to today’s value.

5-year cash flow forecast

2019 2020 2021 2022 2023
Levered FCF (€, Millions) €752.48 €727.34 €1.01k €1.11k €1.09k
Source Analyst x9 Analyst x8 Analyst x3 Analyst x1 Analyst x1
Present Value Discounted @ 9.99% €684.14 €601.22 €757.30 €760.49 €677.13

Present Value of 5-year Cash Flow (PVCF)= €3.5b

After calculating the present value of future cash flows in the intial 5-year period we need to calculate the Terminal Value, which accounts for all the future cash flows beyond the first stage. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 0.4%. We discount this to today’s value at a cost of equity of 10%.

Terminal Value (TV) = FCF2023 × (1 + g) ÷ (r – g) = €1.1b × (1 + 0.4%) ÷ (10% – 0.4%) = €11b

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = €11b ÷ ( 1 + 10%)5 = €7.1b

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 €11b. To get the intrinsic value per share, we divide this by the total number of shares outstanding, or the equivalent number if this is a depositary receipt or ADR. This results in an intrinsic value of €61.33. Relative to the current share price of €82.72, the stock is quite expensive and not available at a discount at this time.

ENXTAM:DSM Intrinsic Value Export February 4th 19
ENXTAM:DSM Intrinsic Value Export February 4th 19

Important 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 my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Koninklijke DSM 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 10%, which is based on a levered beta of 0.999. 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.

Next Steps:

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 DSM, I’ve put together three essential aspects you should look at:

  1. Financial Health: Does DSM 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.
  2. Future Earnings: How does DSM’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: Are there other high quality stocks you could be holding instead of DSM? 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 AMS every 6 hours. If you want to find the calculation for other stocks just search here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.