Calculating The Fair Value Of Intea Fastigheter AB (publ) (STO:INTEA B)

Key Insights

• Intea Fastigheter's estimated fair value is kr63.92 based on 2 Stage Free Cash Flow to Equity
• Intea Fastigheter's kr64.45 share price indicates it is trading at similar levels as its fair value estimate
• Industry average of 6,138% suggests Intea Fastigheter's peers are currently trading at a higher premium to fair value

How far off is Intea Fastigheter AB (publ) (STO:INTEA B) 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 forecast future cash flows of the company and discounting them back to today's value. This will be done using the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

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The Calculation

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 begin with, we have to get estimates of 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.

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) forecast

	2026	2027	2028	2029	2030	2031	2032	2033	2034	2035
Levered FCF (SEK, Millions)	kr1.01b	kr1.12b	kr1.22b	kr1.30b	kr1.37b	kr1.42b	kr1.47b	kr1.51b	kr1.55b	kr1.59b
Growth Rate Estimate Source	Est @ 15.87%	Est @ 11.62%	Est @ 8.65%	Est @ 6.56%	Est @ 5.10%	Est @ 4.08%	Est @ 3.37%	Est @ 2.87%	Est @ 2.52%	Est @ 2.27%
Present Value (SEK, Millions) Discounted @ 8.7%	kr925	kr950	kr949	kr930	kr900	kr861	kr819	kr775	kr731	kr687

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = kr8.5b

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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 1.7%. We discount the terminal cash flows to today's value at a cost of equity of 8.7%.

Terminal Value (TV)= FCF₂₀₃₅ × (1 + g) ÷ (r – g) = kr1.6b× (1 + 1.7%) ÷ (8.7%– 1.7%) = kr23b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= kr23b÷ ( 1 + 8.7%)¹⁰= kr10.0b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is kr18b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of kr64.5, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

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 Intea Fastigheter 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 8.7%, which is based on a levered beta of 1.666. 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.

Check out our latest analysis for Intea Fastigheter

SWOT Analysis for Intea Fastigheter

Looking Ahead:

Although the valuation of a company is important, it shouldn't be the only metric you look at when researching 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. For Intea Fastigheter, we've put together three further items you should look at:

1. Risks: Be aware that Intea Fastigheter is showing 3 warning signs in our investment analysis , and 2 of those can't be ignored...
2. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for INTEA B's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
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. 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.

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.