Calculating The Fair Value Of Candles Scandinavia AB (publ) (STO:CANDLE B)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Candles Scandinavia fair value estimate is kr25.36
• Current share price of kr20.50 suggests Candles Scandinavia is potentially trading close to its fair value
• Peers of Candles Scandinavia are currently trading on average at a 26% premium

How far off is Candles Scandinavia AB (publ) (STO:CANDLE 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. Our analysis will employ the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.

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 want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

View our latest analysis for Candles Scandinavia

The Method

We're 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 a stable growth rate. To begin with, we have to get estimates of 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.

Generally we assume that a dollar today is more valuable than a dollar in the future, 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) estimate

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (SEK, Millions)	-kr1.00m	-kr4.00m	kr4.00m	kr6.19m	kr8.59m	kr10.9m	kr13.1m	kr14.9m	kr16.4m	kr17.6m
Growth Rate Estimate Source	Analyst x1	Analyst x1	Analyst x1	Est @ 54.86%	Est @ 38.72%	Est @ 27.43%	Est @ 19.53%	Est @ 13.99%	Est @ 10.12%	Est @ 7.41%
Present Value (SEK, Millions) Discounted @ 6.7%	-kr0.9	-kr3.5	kr3.3	kr4.8	kr6.2	kr7.4	kr8.3	kr8.9	kr9.2	kr9.2

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = kr53m

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 1.1%. We discount the terminal cash flows to today's value at a cost of equity of 6.7%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = kr18m× (1 + 1.1%) ÷ (6.7%– 1.1%) = kr318m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= kr318m÷ ( 1 + 6.7%)¹⁰= kr166m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is kr219m. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of kr20.5, the company appears about fair value at a 19% 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.

Important Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Candles Scandinavia 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 1.361. 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 Candles Scandinavia

Next Steps:

Valuation is only one side of the coin in terms of building your investment thesis, and 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. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Candles Scandinavia, we've compiled three pertinent aspects you should look at:

1. Risks: To that end, you should be aware of the 1 warning sign we've spotted with Candles Scandinavia .
2. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for CANDLE B's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
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. Simply Wall St updates its DCF calculation for every Swedish stock every day, so if you want to find the intrinsic value of any other stock 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.