Estimating The Fair Value Of Krona Public Real Estate AB (publ) (NGM:KRONA)

Key Insights

• Krona Public Real Estate's estimated fair value is kr59.43 based on 2 Stage Free Cash Flow to Equity
• Current share price of kr55.00 suggests Krona Public Real Estate is potentially trading close to its fair value
• Krona Public Real Estate's peers are currently trading at a premium of 268% on average

In this article we are going to estimate the intrinsic value of Krona Public Real Estate AB (publ) (NGM:KRONA) by estimating the company's future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model on this occasion. Don't get put off by the jargon, the math behind it is actually quite straightforward.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

Check out our latest analysis for Krona Public Real Estate

Is Krona Public Real Estate 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 start off with, we need to estimate the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last 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

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (SEK, Millions)	kr30.9m	kr29.3m	kr28.3m	kr27.7m	kr27.3m	kr27.1m	kr27.1m	kr27.1m	kr27.2m	kr27.3m
Growth Rate Estimate Source	Est @ -7.85%	Est @ -5.26%	Est @ -3.45%	Est @ -2.18%	Est @ -1.29%	Est @ -0.67%	Est @ -0.23%	Est @ 0.07%	Est @ 0.28%	Est @ 0.43%
Present Value (SEK, Millions) Discounted @ 11%	kr27.9	kr23.9	kr20.8	kr18.4	kr16.4	kr14.7	kr13.2	kr11.9	kr10.8	kr9.8

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = kr168m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 0.8%. We discount the terminal cash flows to today's value at a cost of equity of 11%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = kr27m× (1 + 0.8%) ÷ (11%– 0.8%) = kr275m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= kr275m÷ ( 1 + 11%)¹⁰= kr99m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is kr266m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of kr55.0, the company appears about fair value at a 7.5% 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.

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Krona Public Real Estate 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 11%, which is based on a levered beta of 2.000. 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 Krona Public Real Estate

Next Steps:

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. 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 Krona Public Real Estate, we've compiled three fundamental aspects you should assess:

1. Risks: For instance, we've identified 2 warning signs for Krona Public Real Estate that you should be aware of.
2. 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!
3. Other Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NGM every day. If you want to find the calculation for other stocks just search here.

Have 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.