Calculating The Fair Value Of Nilsson Special Vehicles AB (publ) (STO:NILS)

Key Insights

• The projected fair value for Nilsson Special Vehicles is kr6.15 based on 2 Stage Free Cash Flow to Equity
• Current share price of kr5.94 suggests Nilsson Special Vehicles is potentially trading close to its fair value
• Nilsson Special Vehicles' peers seem to be trading at a higher discount to fair value based onthe industry average of 21%

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Nilsson Special Vehicles AB (publ) (STO:NILS) as an investment opportunity by projecting its future cash flows and then discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

View our latest analysis for Nilsson Special Vehicles

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. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last 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 discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (SEK, Millions)	kr3.57m	kr3.05m	kr2.75m	kr2.57m	kr2.45m	kr2.38m	kr2.33m	kr2.31m	kr2.29m	kr2.29m
Growth Rate Estimate Source	Est @ -20.91%	Est @ -14.43%	Est @ -9.90%	Est @ -6.73%	Est @ -4.51%	Est @ -2.96%	Est @ -1.87%	Est @ -1.11%	Est @ -0.57%	Est @ -0.20%
Present Value (SEK, Millions) Discounted @ 9.0%	kr3.3	kr2.6	kr2.1	kr1.8	kr1.6	kr1.4	kr1.3	kr1.2	kr1.1	kr1.0

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = kr17m

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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 0.7%. We discount the terminal cash flows to today's value at a cost of equity of 9.0%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = kr2.3m× (1 + 0.7%) ÷ (9.0%– 0.7%) = kr28m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= kr28m÷ ( 1 + 9.0%)¹⁰= kr12m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is kr29m. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of kr5.9, the company appears about fair value at a 3.4% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

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 these inputs, I recommend redoing the calculations yourself and playing with them. 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 Nilsson Special Vehicles 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 9.0%, which is based on a levered beta of 1.671. 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.

Looking Ahead:

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. It's not possible to obtain a foolproof valuation with a DCF model. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Nilsson Special Vehicles, there are three further items you should consider:

1. Risks: For example, we've discovered 1 warning sign for Nilsson Special Vehicles that you should be aware of before investing here.
2. Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
3. Other Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the OM 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.