Stock Analysis
Estimating The Intrinsic Value Of Hemnet Group AB (publ) (STO:HEM)
Key Insights
- The projected fair value for Hemnet Group is kr388 based on 2 Stage Free Cash Flow to Equity
- Hemnet Group's kr387 share price indicates it is trading at similar levels as its fair value estimate
- Analyst price target for HEM is kr432, which is 11% above our fair value estimate
In this article we are going to estimate the intrinsic value of Hemnet Group AB (publ) (STO:HEM) by projecting its future cash flows and then discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.
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. 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 Hemnet Group
Crunching The Numbers
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 start off with, we need to estimate 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 discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) estimate
2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | |
Levered FCF (SEK, Millions) | kr795.5m | kr983.9m | kr1.27b | kr1.45b | kr1.58b | kr1.69b | kr1.77b | kr1.84b | kr1.89b | kr1.94b |
Growth Rate Estimate Source | Analyst x5 | Analyst x5 | Analyst x2 | Analyst x1 | Est @ 9.04% | Est @ 6.65% | Est @ 4.98% | Est @ 3.81% | Est @ 2.99% | Est @ 2.42% |
Present Value (SEK, Millions) Discounted @ 5.5% | kr754 | kr884 | kr1.1k | kr1.2k | kr1.2k | kr1.2k | kr1.2k | kr1.2k | kr1.2k | kr1.1k |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = kr11b
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 (1.1%) 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 5.5%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = kr1.9b× (1 + 1.1%) ÷ (5.5%– 1.1%) = kr45b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= kr45b÷ ( 1 + 5.5%)10= kr26b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is kr37b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of kr387, the company appears about fair value at a 0.4% discount to where the stock price trades currently. 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.
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. 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 Hemnet Group 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 5.5%, which is based on a levered beta of 1.066. 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 Hemnet Group
- Earnings growth over the past year exceeded the industry.
- Debt is not viewed as a risk.
- Dividend is low compared to the top 25% of dividend payers in the Interactive Media and Services market.
- Annual earnings are forecast to grow faster than the Swedish market.
- Current share price is below our estimate of fair value.
- No apparent threats visible for HEM.
Next Steps:
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 Hemnet Group, we've compiled three relevant elements you should further research:
- Risks: We feel that you should assess the 1 warning sign for Hemnet Group we've flagged before making an investment in the company.
- Future Earnings: How does HEM'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.
Valuation is complex, but we're here to simplify it.
Discover if Hemnet Group might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
Access Free AnalysisHave feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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:HEM
Hemnet Group
Operates a residential property platform in Sweden.