Estimated fair value of Concejo AB (publ) (STO:CNCJO B)
Does Concejo AB (publ) (STO:CNCJO B) share price in February reflect what it is really worth? Today we are going to estimate the intrinsic value of the stock by projecting its future cash flows and then discounting them to the present value. On this occasion, we will use the Discounted Cash Flow (DCF) model. Don’t be put off by the jargon, the underlying calculations are actually quite simple.
We draw your attention to the fact that there are many ways to value a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. For those who are passionate about stock analysis, the Simply Wall St analysis template here may interest you.
See our latest review for Concejo
The method
We will use a two-stage DCF model which, as the name suggests, takes into account two stages of growth. The first stage is usually a period of higher growth which stabilizes towards the terminal value, captured in the second period of “sustained growth”. To start, we need to estimate the cash flows for 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, and so the sum of these future cash flows is then discounted to today’s value:
Estimated free cash flow (FCF) over 10 years
2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | |
Leveraged FCF (SEK, millions) | -2,000,000 kr | kr7.00m | 12.7 million kr | 20.0 million kr | 28.1 million kr | kr36.0 million | 43.2 million kr | 49.2 million kr | 54.1 million kr | 57.9 million kr |
Growth rate estimate Source | Analyst x1 | Analyst x1 | Is at 81.78% | Is @ 57.34% | Is at 40.23% | Is at 28.25% | Is at 19.87% | East @ 14% | Is 9.89% | Is at 7.02% |
Present value (SEK, million) discounted at 6.7% | -kr1.9 | kr6.2 | 10.5 kr | 15.5 kr | 20.3 kr | 24.4kr | 27.5 kr | 29.4kr | 30.2 kr | 30.3 kr |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = 192 million kr
The second stage is also known as the terminal value, it is the cash flow of the business after 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 (0.3%) 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 6.7%.
Terminal value (TV)= FCF_{2031} × (1 + g) ÷ (r – g) = kr58m × (1 + 0.3%) ÷ (6.7%– 0.3%) = kr912m
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= kr912m÷ ( 1 + 6.7%)^{ten}= 478 million kr
The total value, or equity value, is then the sum of the present value of future cash flows, which in this case is 670 million kr. In the last step, we divide the equity value by the number of shares outstanding. Compared to the current share price of 58.0 kr, the company appears around fair value at the time of writing. Remember though that this is only a rough estimate, and like any complex formula – trash in, trash out.
Important assumptions
The above calculation is highly dependent on two assumptions. One is the discount rate and the other is the cash flows. If you disagree with these results, try the math yourself and play around with the assumptions. 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 Concejo 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 factors in debt. In this calculation, we used 6.7%, which is based on a leveraged beta of 1.500. 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.
Next steps:
Although important, the DCF calculation is just one of many factors you need to assess for a business. DCF models are not the be-all and end-all of investment valuation. Preferably, you would apply different cases and assumptions and see their impact on the valuation of the business. For example, changes in the company’s cost of equity or the risk-free rate can have a significant impact on the valuation. For Concejo, there are three relevant factors to consider:
- Risks: For example, we spotted 3 warning signs for Concejo you should be aware of, and 1 of them is potentially serious.
- Future earnings: How does CNCJO B’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 Swedish 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.