- Metals and Mining
Are Investors Undervaluing Boliden AB (publ) (STO:BOL) By 43%?
- Boliden's estimated fair value is kr671 based on 2 Stage Free Cash Flow to Equity
- Boliden's kr383 share price signals that it might be 43% undervalued
- Analyst price target for BOL is kr418 which is 38% below our fair value estimate
Today we will run through one way of estimating the intrinsic value of Boliden AB (publ) (STO:BOL) by taking the forecast future cash flows of the company and discounting them back to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
See our latest analysis for Boliden
Is Boliden Fairly Valued?
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. 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.
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
|Levered FCF (SEK, Millions)||kr4.71b||kr6.29b||kr10.4b||kr11.6b||kr12.5b||kr13.2b||kr13.7b||kr14.2b||kr14.5b||kr14.7b|
|Growth Rate Estimate Source||Analyst x6||Analyst x6||Analyst x4||Est @ 10.97%||Est @ 7.83%||Est @ 5.63%||Est @ 4.09%||Est @ 3.01%||Est @ 2.26%||Est @ 1.73%|
|Present Value (SEK, Millions) Discounted @ 7.3%||kr4.4k||kr5.5k||kr8.5k||kr8.7k||kr8.8k||kr8.7k||kr8.4k||kr8.1k||kr7.7k||kr7.3k|
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = kr76b
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 7.3%.
Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = kr15b× (1 + 0.5%) ÷ (7.3%– 0.5%) = kr218b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= kr218b÷ ( 1 + 7.3%)10= kr108b
The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is kr184b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of kr383, the company appears quite undervalued at a 43% discount to where the stock price trades currently. 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.
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual 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 Boliden 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 7.3%, which is based on a levered beta of 1.145. 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 Boliden
- Earnings growth over the past year exceeded the industry.
- Debt is not viewed as a risk.
- Dividend is in the top 25% of dividend payers in the market.
- No major weaknesses identified for BOL.
- Good value based on P/E ratio and estimated fair value.
- Significant insider buying over the past 3 months.
- Dividends are not covered by cash flow.
- Annual earnings are forecast to decline for the next 3 years.
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. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. Why is the intrinsic value higher than the current share price? For Boliden, we've put together three essential factors you should explore:
- Risks: Be aware that Boliden is showing 2 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...
- Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for BOL's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
- 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 OM every day. If you want to find the calculation for other stocks just search here.
Valuation is complex, but we're helping make it simple.
Find out whether Boliden is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
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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.
Boliden AB (publ) engages in the exploring, extracting, and processing of base metals and precious metals in Sweden, other Nordic region, Germany, the United Kingdom, the rest of Europe, North America, and internationally.
Outstanding track record with excellent balance sheet and pays a dividend.