Estimating The Intrinsic Value Of Bygghemma Group First AB (publ) (STO:BHG)
In this article I am going to calculate the intrinsic value of Bygghemma Group First AB (publ) (STO:BHG) by estimating the company’s future cash flows and discounting them to their present value. This is done using the discounted cash flows (DCF) model. It may sound complicated, but actually it is quite simple! If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model. If you are reading this and its not November 2018 then I highly recommend you check out the latest calculation for Bygghemma Group First by following the link below.
View our latest analysis for Bygghemma Group First
The model
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second ‘steady growth’ period. To start off with we need to estimate the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. The sum of these cash flows is then discounted to today’s value.
5-year cash flow forecast
2019 | 2020 | 2021 | 2022 | 2023 | |
Levered FCF (SEK, Millions) | SEK203.50 | SEK259.50 | SEK306.21 | SEK358.27 | SEK415.59 |
Source | Analyst x2 | Analyst x2 | Est @ 18%, capped from 30.2% | Est @ 17%, capped from 30.2% | Est @ 16%, capped from 30.2% |
Present Value Discounted @ 10.21% | SEK184.65 | SEK213.66 | SEK228.77 | SEK242.87 | SEK255.64 |
Present Value of 5-year Cash Flow (PVCF)= kr1.1b
The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 0.7%. We discount this to today’s value at a cost of equity of 10.2%.
Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = kr416m × (1 + 0.7%) ÷ (10.2% – 0.7%) = kr4.4b
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = kr4.4b ÷ ( 1 + 10.2%)5 = kr2.7b
The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is kr3.8b. In the final step we divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) or ADR then we use the equivalent number. This results in an intrinsic value of SEK35.65. Relative to the current share price of SEK33, the stock is about right, perhaps slightly undervalued at a 7.4% discount to what it is available for right now.
Important assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don’t agree with my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at Bygghemma Group First as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 10.2%, which is based on a levered beta of 1.022. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
Next Steps:
Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn’t be the only metric you look at when researching a company. For BHG, I’ve put together three relevant aspects you should further examine:
Financial Health: Does BHG 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 Earnings: How does BHG’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of BHG? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. Simply Wall St does a DCF calculation for every SE stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
