Is P/F Bakkafrost (OB:BAKKA) Expensive For A Reason? A Look At The Intrinsic Value

Does the share price for P/F Bakkafrost (OB:BAKKA) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value by projecting its future cash flows and then discounting them to today’s value. This is done using the discounted cash flows (DCF) model. It may sound complicated, but actually it is quite simple! Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. If you are reading this and its not August 2018 then I highly recommend you check out the latest calculation for P/F Bakkafrost by following the link below.

View our latest analysis for P/F Bakkafrost

What’s the value?

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

2018 2019 2020 2021 2022
Levered FCF (DKK, Millions) DKK553.38 DKK834.11 DKK892.56 DKK984.13 DKK1.09k
Source Analyst x6 Analyst x7 Analyst x7 Est @ 10.26% Est @ 10.26%
Present Value Discounted @ 8.4% DKK510.50 DKK709.87 DKK700.76 DKK712.80 DKK725.03

Present Value of 5-year Cash Flow (PVCF)= ø3.36b

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 2%. We discount this to today’s value at a cost of equity of 8.4%.

Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = ø1.09b × (1 + 2%) ÷ (8.4% – 2%) = ø17.27b

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = ø17.27b ÷ ( 1 + 8.4%)5 = ø11.54b

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 ø14.90b. 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 in the company’s reported currency of DKK306.26. However, BAKKA’s primary listing is in Denmark, and 1 share of BAKKA in DKK represents 1.281 ( DKK/ NOK) share of OB:BAKKA, so the intrinsic value per share in NOK is NOK392.18. Compared to the current share price of NOK493.2, the stock is fair value, maybe slightly overvalued and not available at a discount at this time.

OB:BAKKA Intrinsic Value Export August 6th 18
OB:BAKKA Intrinsic Value Export August 6th 18

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 my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at P/F Bakkafrost 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 8.4%, 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.

Next Steps:

Valuation is only one side of the coin in terms of building your investment thesis, and 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 BAKKA, there are three relevant aspects you should further research:

  1. Financial Health: Does BAKKA 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 BAKKA’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 BAKKA? 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 NO stock every 6 hours, so if you want to find the intrinsic value of any other stock 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.