Estimating The Fair Value Of Sprint Bioscience AB (publ) (STO:SPRINT)

Key Insights

• The projected fair value for Sprint Bioscience is kr0.77 based on 2 Stage Free Cash Flow to Equity
• Current share price of kr0.63 suggests Sprint Bioscience is potentially trading close to its fair value
• Industry average discount to fair value of 24% suggests Sprint Bioscience's peers are currently trading at a higher discount

How far off is Sprint Bioscience AB (publ) (STO:SPRINT) 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. Believe it or not, it's not too difficult to follow, as you'll see from our example!

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. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

See our latest analysis for Sprint Bioscience

The Model

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.

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

	2023	2024	2025	2026	2027	2028	2029	2030	2031	2032
Levered FCF (SEK, Millions)	kr2.00m	kr32.0m	kr10.0m	kr3.27m	kr1.73m	kr1.17m	kr900.9k	kr759.2k	kr676.9k	kr626.6k
Growth Rate Estimate Source	Analyst x1	Analyst x1	Analyst x1	Est @ -67.34%	Est @ -46.96%	Est @ -32.70%	Est @ -22.72%	Est @ -15.73%	Est @ -10.84%	Est @ -7.42%
Present Value (SEK, Millions) Discounted @ 5.3%	kr1.9	kr28.8	kr8.6	kr2.7	kr1.3	kr0.9	kr0.6	kr0.5	kr0.4	kr0.4

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = kr46m

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 0.6%. We discount the terminal cash flows to today's value at a cost of equity of 5.3%.

Terminal Value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = kr627k× (1 + 0.6%) ÷ (5.3%– 0.6%) = kr13m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= kr13m÷ ( 1 + 5.3%)¹⁰= kr7.9m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is kr54m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of kr0.6, the company appears about fair value at a 19% 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.

Important Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 Sprint Bioscience 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 0.800. 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.

SWOT Analysis for Sprint Bioscience

Moving On:

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. 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. 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. For Sprint Bioscience, we've compiled three fundamental factors you should explore:

1. Risks: To that end, you should learn about the 6 warning signs we've spotted with Sprint Bioscience (including 5 which are a bit unpleasant) .
2. Future Earnings: How does SPRINT'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.
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.