Does This Valuation Of Cibus Nordic Real Estate AB (publ) (STO:CIBUS) Imply Investors Are Overpaying?

Key Insights

• Cibus Nordic Real Estate's estimated fair value is kr141 based on 2 Stage Free Cash Flow to Equity
• Current share price of kr178 suggests Cibus Nordic Real Estate is potentially 26% overvalued
• Analyst price target for CIBUS is €179, which is 27% above our fair value estimate

Today we will run through one way of estimating the intrinsic value of Cibus Nordic Real Estate AB (publ) (STO:CIBUS) by estimating the company's future cash flows and discounting them to their present value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

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. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

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Is Cibus Nordic Real Estate Fairly Valued?

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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, 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

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (€, Millions)	€85.0m	€84.0m	€89.0m	€87.5m	€86.9m	€86.8m	€87.1m	€87.7m	€88.5m	€89.5m
Growth Rate Estimate Source	Analyst x1	Analyst x1	Analyst x1	Est @ -1.68%	Est @ -0.74%	Est @ -0.08%	Est @ 0.38%	Est @ 0.70%	Est @ 0.92%	Est @ 1.08%
Present Value (€, Millions) Discounted @ 9.1%	€77.9	€70.6	€68.6	€61.8	€56.3	€51.6	€47.5	€43.8	€40.5	€37.6

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = €556m

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 1.5%. We discount the terminal cash flows to today's value at a cost of equity of 9.1%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = €89m× (1 + 1.5%) ÷ (9.1%– 1.5%) = €1.2b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= €1.2b÷ ( 1 + 9.1%)¹⁰= €501m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is €1.1b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of kr178, the company appears slightly overvalued at the time of writing. 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. 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 Cibus Nordic 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 9.1%, which is based on a levered beta of 1.759. 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.

View our latest analysis for Cibus Nordic Real Estate

SWOT Analysis for Cibus Nordic Real Estate

Next Steps:

Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/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. Why is the intrinsic value lower than the current share price? For Cibus Nordic Real Estate, we've put together three additional elements you should consider:

1. Risks: We feel that you should assess the 4 warning signs for Cibus Nordic Real Estate (2 shouldn't be ignored!) we've flagged before making an investment in the company.
2. Future Earnings: How does CIBUS'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 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. 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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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.