The intrinsic value of Bravida Holding AB (publ) (STO:BRAV) is potentially 59% higher than its share price
In this article, we will estimate the intrinsic value of Bravida Holding AB (publ) (STO:BRAV) by taking expected future cash flows and discounting them to their present value. This will be done using the discounted cash flow (DCF) model. There really isn’t much to do, although it may seem quite complex.
Businesses can be valued in many ways, which is why we emphasize that a DCF is not perfect for all situations. For those who are passionate about stock analysis, the Simply Wall St analysis template here may interest you.
Check out our latest analysis for Bravida Holding
The model
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”. 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.
Generally, we assume that a dollar today is worth more than a dollar in the future, 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
2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | |
Leveraged FCF (SEK, millions) | kr1.52b | kr1.56b | kr1.59b | kr1.61b | kr1.62b | kr1.63b | kr1.64b | kr1.65b | kr1.66b | kr1.67b |
Growth rate estimate Source | Analyst x2 | Analyst x2 | Is at 1.62% | Is at 1.24% | Is 0.96% | Is at 0.77% | Is at 0.64% | Is at 0.55% | Is at 0.48% | Is at 0.44% |
Present value (SEK, million) discounted at 4.6% | kr1.5k | kr1.4k | kr1.4k | kr1.3k | kr1.3k | kr1.2k | kr1.2k | kr1.2k | kr1.1k | kr1.1k |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = kr13b
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 (0.3%) 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 4.6%.
Terminal value (TV)= FCF_{2031} × (1 + g) ÷ (r – g) = kr1.7b × (1 + 0.3%) ÷ (4.6%–0.3%) = kr39b
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= kr39b÷ ( 1 + 4.6%)^{ten}= kr25b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is 38 kr. The final step is to divide the equity value by the number of shares outstanding. Compared to the current share price of 117 kr, the company seems to have quite good value with a discount of 37% from the current share price. Remember though that this is only a rough estimate, and like any complex formula – trash in, trash out.
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 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 complete picture of a company’s potential performance. Since we consider Bravida Holding 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 4.6%, which is based on a leveraged beta of 0.974. 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 crafting your investment thesis, and it shouldn’t be the only metric you look at when researching a company. It is not possible to obtain an infallible valuation with a DCF model. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under/overvalued?” For example, if the terminal value growth rate is adjusted slightly, it can significantly change the overall result. Why is the stock price below intrinsic value? For Bravida Holding, we have put together three important aspects that you should explore:
- Risks: For example, we discovered 2 warning signs for Bravida Holding which you should be aware of before investing here.
- Future earnings: How does BRAV’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. The Simply Wall St app performs an updated cash flow valuation for every stock on OM every day. If you want to find the calculation for other stocks, search here.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
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.