Crayon Group Holding ASA (OB:CRAYN) Shares Could Be 40% Below Their Intrinsic Value Estimate

Key Insights

• Crayon Group Holding's estimated fair value is kr182 based on 2 Stage Free Cash Flow to Equity
• Current share price of kr109 suggests Crayon Group Holding is 40% undervalued
• Analyst price target for CRAYN is kr152 which is 16% below our fair value estimate

Today we will run through one way of estimating the intrinsic value of Crayon Group Holding ASA (OB:CRAYN) by taking the forecast future cash flows of the company and discounting them back to today's value. This will be done using the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

See our latest analysis for Crayon Group Holding

The Model

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To start off with, we need to estimate 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, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) forecast

	2023	2024	2025	2026	2027	2028	2029	2030	2031	2032
Levered FCF (NOK, Millions)	kr900.8m	kr956.3m	kr996.3m	kr1.03b	kr1.06b	kr1.08b	kr1.10b	kr1.12b	kr1.13b	kr1.15b
Growth Rate Estimate Source	Analyst x4	Analyst x4	Est @ 4.18%	Est @ 3.27%	Est @ 2.63%	Est @ 2.18%	Est @ 1.87%	Est @ 1.65%	Est @ 1.50%	Est @ 1.39%
Present Value (NOK, Millions) Discounted @ 7.4%	kr839	kr829	kr804	kr773	kr739	kr703	kr667	kr631	kr596	kr563

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = kr7.1b

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 1.1%. We discount the terminal cash flows to today's value at a cost of equity of 7.4%.

Terminal Value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = kr1.1b× (1 + 1.1%) ÷ (7.4%– 1.1%) = kr19b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= kr19b÷ ( 1 + 7.4%)¹⁰= kr9.1b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is kr16b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of kr109, the company appears quite undervalued at a 40% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

The Assumptions

We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. 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 Crayon Group Holding 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 7.4%, which is based on a levered beta of 1.124. 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 Crayon Group Holding

Looking Ahead:

Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for a company. DCF models are not the be-all and end-all of investment valuation. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Why is the intrinsic value higher than the current share price? For Crayon Group Holding, we've put together three important factors you should further research:

1. Risks: We feel that you should assess the 2 warning signs for Crayon Group Holding (1 makes us a bit uncomfortable!) we've flagged before making an investment in the company.
2. Future Earnings: How does CRAYN'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 OB 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.