Is Novozymes A / S (CPH: NZYM B) worth 537 kr due to its intrinsic value?
Does the January price of Novozymes A / S (CPH: NZYM B) share reflect its true value? Today we’re going to estimate the intrinsic value of the stock by taking expected future cash flows and discounting them to today’s value. To this end, we will take advantage of the Discounted Cash Flow (DCF) model. Patterns like these may seem beyond a layman’s comprehension, but they are fairly easy to follow.
There are many ways that businesses can be assessed, so we would like to point out that a DCF is not perfect for all situations. Anyone interested in learning a bit more about intrinsic value should read the Simply Wall St.
See our latest review for Novozymes
Step by step in the calculation
We are going to use a two-step 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 “steady growth”. First, we need to estimate the cash flow of the business over the next ten years. Where possible, we use analyst estimates, but when these are not available, we extrapolate the previous free cash flow (FCF) from the last estimate or stated 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 down more in the early years than in subsequent years.
A DCF is based on the idea that a dollar in the future is worth less than a dollar today, so we need to discount the sum of these future cash flows to arrive at an estimate of the present value:
10-year Free Cash Flow (FCF) estimate
2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | |
Leverage FCF (DKK, Millions) | kr.2.52b | kr.2.69b | kr.3.53b | kr.3.83b | kr.4.35b | kr.4.70b | 4.97 kr | 5.17b | kr.5.32b | 5.43b |
Source of estimated growth rate | Analyst x13 | Analyst x12 | Analyst x4 | Analyst x3 | Analyst x1 | Est @ 8.17% | Est @ 5.75% | East @ 4.06% | East @ 2.87% | East @ 2.04% |
Present value (DKK, millions) discounted at 4.4% | kr.2.4k | kr.2.5k | kr.3.1k | kr.3.2k | kr.3.5k | kr.3.6k | kr 3.7k | kr 3.7k | kr.3.6k | kr.3.5k |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = kr.33b
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 step. The Gordon growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 0.1%. We discount the terminal cash flows to their present value at a cost of equity of 4.4%.
Terminal value (TV)= FCF_{2031} × (1 + g) ÷ (r – g) = kr.5.4b × (1 + 0.1%) ÷ (4.4% – 0.1%) = kr.127b
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= kr. 127b ÷ (1 + 4.4%)^{ten}= kr.83b
Total value, or net worth, is then the sum of the present value of future cash flows, which in this case is 116b kr. The last step is then to divide the equity value by the number of shares outstanding. Compared to the current share price of 537 kroner, the company appears to be slightly overvalued at the time of writing. Ratings are imprecise instruments, however, much like a telescope – move a few degrees and end up in another galaxy. Keep this in mind.
The hypotheses
We draw your attention to the fact that 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 entries, I recommend that 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 full picture of a company’s potential performance. Since we view Novozymes 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 4.4%, which is based on a leveraged beta of 0.974. Beta is a measure of the volatility of a stock relative to the market as a whole. We get our industry average beta from comparable companies globally, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
Move on :
While valuing a business is important, it’s just one of the many factors you need to assess for a business. DCF models are not the ultimate solution for investment valuation. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under / overvalued?” If a business grows at a different rate, or if its cost of equity or risk-free rate changes sharply, output can be very different. What is the reason why the stock price exceeds intrinsic value? For Novozymes, we’ve put together three other factors to consider:
- Financial health: Does NZYM B have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
- Future benefits: How does NZYM B’s growth rate compare to that of its peers and the broader market? Dig deeper into the analyst consensus number for years to come by interacting with our free analyst growth expectations chart.
- Other strong companies: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid trading fundamentals to see if there are other companies you may not have considered!
PS. The Simply Wall St app performs a daily discounted cash flow assessment for each CPSE share. If you want to find the calculation for other actions, 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 using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.