Estimating The Fair Value Of Enzymatica AB (STO:ENZY)

By
Simply Wall St
Published
January 13, 2022
OM:ENZY
Source: Shutterstock

Today we will run through one way of estimating the intrinsic value of Enzymatica AB (STO:ENZY) by taking the forecast future cash flows of the company and discounting them back to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!

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.

View our latest analysis for Enzymatica

The model

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. 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

2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Levered FCF (SEK, Millions) -kr10.8m kr6.85m kr12.1m kr18.6m kr25.7m kr32.5m kr38.5m kr43.6m kr47.7m kr50.8m
Growth Rate Estimate Source Analyst x2 Analyst x2 Est @ 76.78% Est @ 53.84% Est @ 37.79% Est @ 26.55% Est @ 18.68% Est @ 13.18% Est @ 9.32% Est @ 6.63%
Present Value (SEK, Millions) Discounted @ 3.8% -kr10.4 kr6.3 kr10.8 kr16.0 kr21.3 kr25.9 kr29.6 kr32.3 kr34.0 kr34.9

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = kr200m

The second stage is also known as Terminal Value, this is the business's cash flow after 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 0.3%. We discount the terminal cash flows to today's value at a cost of equity of 3.8%.

Terminal Value (TV)= FCF2031 × (1 + g) ÷ (r – g) = kr51m× (1 + 0.3%) ÷ (3.8%– 0.3%) = kr1.5b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= kr1.5b÷ ( 1 + 3.8%)10= kr999m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is kr1.2b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of kr6.6, the company appears about fair value at a 18% 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.

dcf
OM:ENZY Discounted Cash Flow January 13th 2022

The assumptions

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 Enzymatica 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 3.8%, which is based on a levered beta of 0.800. 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.

Moving On:

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. It's not possible to obtain a foolproof valuation with a DCF model. 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 example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Enzymatica, we've put together three further elements you should explore:

  1. Risks: To that end, you should be aware of the 2 warning signs we've spotted with Enzymatica .
  2. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for ENZY'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. 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.

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