Calculating The Fair Value Of Billerud AB (publ) (STO:BILL)
- Using the 2 Stage Free Cash Flow to Equity, Billerud fair value estimate is kr101
- With kr109 share price, Billerud appears to be trading close to its estimated fair value
- The kr131 analyst price target for BILL is 30% more than our estimate of fair value
How far off is Billerud AB (publ) (STO:BILL) 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. Don't get put off by the jargon, the math behind it is actually quite straightforward.
We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. 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 Billerud
Is Billerud Fairly Valued?
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. In the first stage we need to estimate the cash flows to the business over the next ten years. 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, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) estimate
|Levered FCF (SEK, Millions)||kr594.3m||kr1.46b||kr2.04b||kr1.69b||kr1.49b||kr1.37b||kr1.29b||kr1.24b||kr1.21b||kr1.19b|
|Growth Rate Estimate Source||Analyst x4||Analyst x4||Analyst x4||Est @ -17.27%||Est @ -11.94%||Est @ -8.21%||Est @ -5.60%||Est @ -3.77%||Est @ -2.49%||Est @ -1.59%|
|Present Value (SEK, Millions) Discounted @ 5.3%||kr564||kr1.3k||kr1.7k||kr1.4k||kr1.1k||kr1k||kr896||kr818||kr758||kr708|
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = kr10b
The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (0.5%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 5.3%.
Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = kr1.2b× (1 + 0.5%) ÷ (5.3%– 0.5%) = kr25b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= kr25b÷ ( 1 + 5.3%)10= kr15b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is kr25b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of kr109, the company appears around fair value at the time of writing. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 Billerud 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 5.3%, which is based on a levered beta of 0.814. 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 Billerud
- Earnings growth over the past year exceeded the industry.
- Debt is not viewed as a risk.
- Dividends are covered by earnings and cash flows.
- Dividend is in the top 25% of dividend payers in the market.
- Shareholders have been diluted in the past year.
- Good value based on P/E ratio compared to estimated Fair P/E ratio.
- Annual earnings are forecast to decline for the next 3 years.
Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. 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 Billerud, we've compiled three fundamental elements you should further research:
- Risks: As an example, we've found 3 warning signs for Billerud (1 is significant!) that you need to consider before investing here.
- Future Earnings: How does BILL'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.
- 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!
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.
Billerud AB (publ) provides paper and packaging materials in Sweden and internationally.
Flawless balance sheet with solid track record and pays a dividend.