Estimating The Fair Value Of NP3 Fastigheter AB (publ) (STO:NP3)

Key Insights

• The projected fair value for NP3 Fastigheter is kr232 based on 2 Stage Free Cash Flow to Equity
• Current share price of kr246 suggests NP3 Fastigheter is potentially trading close to its fair value
• Industry average of 1,340% suggests NP3 Fastigheter's peers are currently trading at a higher premium to fair value

In this article we are going to estimate the intrinsic value of NP3 Fastigheter AB (publ) (STO:NP3) by estimating the company's future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

Check out our latest analysis for NP3 Fastigheter

Crunching The Numbers

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. 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, 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 (SEK, Millions)	kr926.9m	kr977.8m	kr1.02b	kr1.05b	kr1.08b	kr1.11b	kr1.13b	kr1.15b	kr1.17b	kr1.19b
Growth Rate Estimate Source	Est @ 7.28%	Est @ 5.49%	Est @ 4.23%	Est @ 3.35%	Est @ 2.74%	Est @ 2.31%	Est @ 2.00%	Est @ 1.79%	Est @ 1.64%	Est @ 1.54%
Present Value (SEK, Millions) Discounted @ 8.5%	kr854	kr830	kr797	kr759	kr718	kr677	kr636	kr597	kr559	kr523

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = kr6.9b

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (1.3%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 8.5%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = kr1.2b× (1 + 1.3%) ÷ (8.5%– 1.3%) = kr17b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= kr17b÷ ( 1 + 8.5%)¹⁰= kr7.3b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is kr14b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of kr246, the company appears around fair value 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. If you don't agree with these result, have a go at the calculation yourself and play with the 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 NP3 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 8.5%, which is based on a levered beta of 1.673. 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 NP3 Fastigheter

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. 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 NP3 Fastigheter, we've compiled three important items you should assess:

1. Risks: We feel that you should assess the 3 warning signs for NP3 Fastigheter (1 is a bit unpleasant!) we've flagged before making an investment in the company.
2. Future Earnings: How does NP3'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.

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.