Key Insights
- Beijer Electronics Group’s estimated fair value is kr191 based on 2 Stage Free Cash Flow to Equity
- Current share price of kr106 suggests Beijer Electronics Group is potentially 44% undervalued
Today we’ll do a simple run through of a valuation method used to estimate the attractiveness of Beijer Electronics Group AB (publ) (STO:BELE) as an investment opportunity by estimating the company’s future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model on this occasion. Before you think you won’t be able to understand it, just read on! It’s actually much less complex than you’d imagine.
Remember though, that there are many ways to estimate a company’s value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
Check out our latest analysis for Beijer Electronics Group
What’s The Estimated Valuation?
We’re using the 2-stage growth model, which simply means we take in account two stages of company’s growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren’t available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) forecast
| 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | |
| Levered FCF (SEK, Millions) | kr260.5m | kr270.0m | kr322.0m | kr358.9m | kr388.3m | kr411.1m | kr428.6m | kr442.1m | kr452.4m | kr460.5m |
| Growth Rate Estimate Source | Analyst x2 | Analyst x1 | Analyst x1 | Est @ 11.47% | Est @ 8.18% | Est @ 5.88% | Est @ 4.26% | Est @ 3.13% | Est @ 2.34% | Est @ 1.79% |
| Present Value (SEK, Millions) Discounted @ 7.8% | kr242 | kr233 | kr257 | kr266 | kr267 | kr263 | kr254 | kr243 | kr231 | kr218 |
(“Est” = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = kr2.5b
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 a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 0.5%. We discount the terminal cash flows to today’s value at a cost of equity of 7.8%.
Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = kr461m× (1 + 0.5%) ÷ (7.8%– 0.5%) = kr6.4b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= kr6.4b÷ ( 1 + 7.8%)10= kr3.0b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is kr5.5b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of kr106, the company appears quite undervalued at a 44% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula – garbage in, garbage out.
The Assumptions
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. If you don’t agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company’s future capital requirements, so it does not give a full picture of a company’s potential performance. Given that we are looking at Beijer Electronics Group 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 accounts for debt. In this calculation we’ve used 7.8%, which is based on a levered beta of 1.222. Beta is a measure of a stock’s volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
SWOT Analysis for Beijer Electronics Group
- Earnings growth over the past year exceeded the industry.
- Debt is well covered by earnings and cashflows.
- Dividend is low compared to the top 25% of dividend payers in the Electronic market.
- Annual earnings are forecast to grow faster than the Swedish market.
- Good value based on P/E ratio and estimated fair value.
- No apparent threats visible for BELE.
Next Steps:
Although the valuation of a company is important, it ideally won’t be the sole piece of analysis you scrutinize for a company. It’s not possible to obtain a foolproof valuation with a DCF model. Rather it should be seen as a guide to “what assumptions need to be true for this stock to be under/overvalued?” For example, changes in the company’s cost of equity or the risk free rate can significantly impact the valuation. Why is the intrinsic value higher than the current share price? For Beijer Electronics Group, we’ve put together three essential factors you should consider:
- Risks: You should be aware of the 1 warning sign for Beijer Electronics Group we’ve uncovered before considering an investment in the company.
- Future Earnings: How does BELE’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 Solid Businesses: 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 business fundamentals to see if there are other companies you may not have considered!
PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the OM every day. If you want to find the calculation for other stocks just search here.
Valuation is complex, but we’re helping make it simple.
Find out whether Beijer Electronics Group is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
