A look at the intrinsic value of Schoeller-Bleckmann Oilfield Equipment Aktiengesellschaft (VIE:SBO)
Today we are going to walk through a way to estimate the intrinsic value of Schoeller-Bleckmann Oilfield Equipment Aktiengesellschaft (VIE:SBO) by estimating the future cash flows of the business and discounting them to their present value. On this occasion, we will use the Discounted Cash Flow (DCF) model. This may sound complicated, but it’s actually quite simple!
Remember though that there are many ways to estimate the value of a business and a DCF is just one method. If you still have burning questions about this type of assessment, take a look at Simply Wall St.’s analysis template.
Check out our latest review for Schoeller-Bleckmann Oilfield Equipment
The calculation
We use the 2-stage growth model, which simply means that we consider two stages of business growth. In the initial period, the company may have a higher growth rate, and the second stage is generally assumed to have a stable growth rate. In the first step, we need to estimate the company’s cash flow over the next ten years. Wherever possible, we use analysts’ estimates, but where these are not available, we extrapolate the previous free cash flow (FCF) from the latest estimate or reported value. We assume that companies with decreasing free cash flow will slow their rate of contraction and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow more in early years than in later years.
A DCF is based on the idea that a dollar in the future is worth less than a dollar today, so we discount the value of these future cash flows to their estimated value in today’s dollars:
Estimated free cash flow (FCF) over 10 years
2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | |
Leveraged FCF (€, Millions) | €19.1 million | €68.3 million | €64.4 million | €62.3 million | €61.0m | €60.2 million | €59.6 million | €59.3 million | €59.1 million | €59.0m |
Growth rate estimate Source | Analyst x5 | Analyst x5 | Analyst x2 | Analyst x2 | East @ -2.06% | Is @ -1.37% | Is @ -0.89% | Is @ -0.55% | Is @ -0.31% | Is @ -0.15% |
Present value (€, millions) discounted at 7.6% | 17.7 € | €59.0 | 51.7 € | 46.5 € | 42.3 € | 38.8 € | 35.8 € | €33.0 | 30.6 € | 28.4 € |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = €383m
After calculating the present value of future cash flows over the initial 10-year period, we need to calculate the terminal value, which takes into account all future cash flows beyond the first stage. For a number of reasons, a very conservative growth rate is used which cannot exceed that of a country’s GDP growth. In this case, we used the 5-year average of the 10-year government bond yield (0.2%) to estimate future growth. Similar to the 10-year “growth” period, we discount future cash flows to present value, using a cost of equity of 7.6%.
Terminal value (TV)= FCF_{2032} × (1 + g) ÷ (r – g) = €59m × (1 + 0.2%) ÷ (7.6%– 0.2%) = €806m
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= €806m÷ ( 1 + 7.6%)^{ten}= €388 million
The total value is the sum of the cash flows for the next ten years plus the present terminal value, which gives the total equity value, which in this case is 771 million euros. To get the intrinsic value per share, we divide it by the total number of shares outstanding. Compared to the current share price of €56.7, the company appears around fair value at the time of writing. Ratings are imprecise instruments, however, much like a telescope – move a few degrees and end up in a different galaxy. Keep that in mind.
The hypotheses
The above calculation is highly dependent on two assumptions. One is the discount rate and the other is the cash flows. You don’t have to agree with these entries, I recommend you redo the calculations yourself and play around with them. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we consider Schoeller-Bleckmann Oilfield Equipment 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 takes debt into account . In this calculation, we used 7.6%, which is based on a leveraged beta of 1.586. Beta is a measure of a stock’s volatility relative to the market as a whole. We derive our beta from the average industry beta of broadly comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
Let’s move on :
Valuation is only one side of the coin in terms of building your investment thesis, and it’s just one of many factors you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company’s cost of equity or the risk-free rate can have a significant impact on the valuation. For Schoeller-Bleckmann Oilfield Equipment, we have compiled three relevant items for you to evaluate:
- Risks: You should be aware of the 2 warning signs for Schoeller-Bleckmann Oilfield Equipment we found out before considering an investment in the business.
- Future earnings: How does SBO’s growth rate compare to its peers and the market in general? Dive deeper into the analyst consensus figure for the coming years by interacting with our free analyst growth forecast chart.
- Other high-quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality actions to get an idea of what you might be missing!
PS. Simply Wall St updates its DCF calculation for every Austrian stock daily, so if you want to find the intrinsic value of any other stock, just search here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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