Is Boliden AB (publ) (STO:BOL) trading at a 34% discount?
Today we are going to walk through a way to estimate the intrinsic value of Boliden AB (publ) (STO:BOL) by estimating the company’s future cash flows and discounting them to their present value. Our analysis will use the discounted cash flow (DCF) model. Don’t be put off by the jargon, the underlying calculations are actually quite simple.
We generally believe that the value of a company is the present value of all the cash it will generate in the future. However, a DCF is just one of many evaluation metrics, and it is not without its flaws. For those who are passionate about stock analysis, the Simply Wall St analysis template here may interest you.
See our latest analysis for Boliden
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 begin with, we need to obtain cash flow estimates 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, 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 (SEK, millions) | kr3.39b | kr6.97b | kr6.89b | kr6.86b | kr6.85b | kr6.85b | kr6.86b | kr6.87b | kr6.89b | kr6.91b |
Growth rate estimate Source | Analyst x8 | Analyst x6 | Analyst x1 | Analyst x1 | East @ -0.14% | Is 0.01% | Is at 0.12% | Is at 0.19% | Is at 0.24% | Is at 0.28% |
Present value (SEK, million) discounted at 5.1% | kr3.2k | kr6.3k | kr5.9k | kr5.6k | kr5.4k | kr5.1k | kr4.9k | kr4.6k | kr4.4k | kr4.2k |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = kr50b
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 (0.4%) 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 5.1%.
Terminal value (TV)= FCF_{2032} × (1 + g) ÷ (r – g) = kr6.9b × (1 + 0.4%) ÷ (5.1%–0.4%) = kr147b
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= kr147b÷ ( 1 + 5.1%)^{ten}= kr90b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is 140 kr. In the last step, we divide the equity value by the number of shares outstanding. Compared to the current share price of 335 kr, the company looks quite undervalued at a 34% discount to the current share price. The assumptions of any calculation have a big impact on the valuation, so it’s best to consider this as a rough estimate, not accurate down to the last penny.
Important assumptions
Now, the most important inputs to a discounted cash flow are the discount rate and, of course, the actual cash flows. Part of investing is coming up with your own assessment of a company’s future performance, so try the math yourself and check your own assumptions. The DCF also does not take into account the possible cyclicality of an industry, nor the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we consider Boliden 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 5.1%, which is based on a leveraged beta of 1.110. 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. It is not possible to obtain an infallible valuation with a DCF model. 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, if the terminal value growth rate is adjusted slightly, it can significantly change the overall result. Can we understand why the company is trading at a discount to its intrinsic value? For Boliden, we have compiled three relevant factors that you should dig deeper into:
- Risks: Take risks, for example – Boliden has 2 warning signs (and 1 which is a little worrying) that we think you should know about.
- Future earnings: How does BOL’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.
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