- Sweden
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- Construction
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- OM:TRAIN B
Estimating The Fair Value Of Train Alliance Sweden AB (publ) (STO:TRAIN B)
Key Insights
- Using the Dividend Discount Model, Train Alliance Sweden fair value estimate is kr21.53
- Current share price of kr23.80 suggests Train Alliance Sweden is potentially trading close to its fair value
How far off is Train Alliance Sweden AB (publ) (STO:TRAIN B) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. 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. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
Check out our latest analysis for Train Alliance Sweden
The Method
We have to calculate the value of Train Alliance Sweden slightly differently to other stocks because it is a construction company. Instead of using free cash flows, which are hard to estimate and often not reported by analysts in this industry, dividends per share (DPS) payments are used. Unless a company pays out the majority of its FCF as a dividend, this method will typically underestimate the value of the stock. The 'Gordon Growth Model' is used, which simply assumes that dividend payments will continue to increase at a sustainable growth rate forever. The dividend is expected to grow at an annual growth rate equal to the 5-year average of the 10-year government bond yield of 0.8%. We then discount this figure to today's value at a cost of equity of 6.7%. Relative to the current share price of kr23.8, the company appears around fair value at the time of writing. 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.
Value Per Share = Expected Dividend Per Share / (Discount Rate - Perpetual Growth Rate)
= kr2.1 / (6.7% – 0.8%)
= kr21.5
Important 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. 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 Train Alliance Sweden 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 6.7%, which is based on a levered beta of 1.190. 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 Train Alliance Sweden
- Debt is well covered by earnings.
- Dividend is in the top 25% of dividend payers in the market.
- Earnings declined over the past year.
- Current share price is above our estimate of fair value.
- TRAIN B's financial characteristics indicate limited near-term opportunities for shareholders.
- Lack of analyst coverage makes it difficult to determine TRAIN B's earnings prospects.
- Debt is not well covered by operating cash flow.
- Dividends are not covered by earnings.
Looking Ahead:
Whilst important, the DCF calculation 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. For Train Alliance Sweden, we've put together three relevant elements you should look at:
- Risks: Every company has them, and we've spotted 3 warning signs for Train Alliance Sweden (of which 1 is significant!) you should know about.
- 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!
- 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.
Valuation is complex, but we're here to simplify it.
Discover if Train Alliance might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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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.
About OM:TRAIN B
Train Alliance
Engages in the development of production facilities for railway-related operations in infrastructure and logistics in Sweden.
Flawless balance sheet with acceptable track record.