Calculating The Fair Value Of KROMI Logistik AG (ETR:K1R)
Simply Wall St
6 min read
Key Insights
Using the 2 Stage Free Cash Flow to Equity, KROMI Logistik fair value estimate is €10.72
KROMI Logistik's €8.70 share price indicates it is trading at similar levels as its fair value estimate
Peers of KROMI Logistik are currently trading on average at a 56% premium
In this article we are going to estimate the intrinsic value of KROMI Logistik AG (ETR:K1R) by projecting its future cash flows and then discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
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. To start off with, we need to estimate the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last 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.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) estimate
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
Levered FCF (€, Millions)
€3.15m
€3.04m
€2.97m
€2.92m
€2.89m
€2.87m
€2.85m
€2.84m
€2.84m
€2.84m
Growth Rate Estimate Source
Est @ -5.03%
Est @ -3.47%
Est @ -2.38%
Est @ -1.62%
Est @ -1.09%
Est @ -0.71%
Est @ -0.45%
Est @ -0.27%
Est @ -0.14%
Est @ -0.05%
Present Value (€, Millions) Discounted @ 6.6%
€3.0
€2.7
€2.4
€2.3
€2.1
€2.0
€1.8
€1.7
€1.6
€1.5
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = €21m
After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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 0.2%. We discount the terminal cash flows to today's value at a cost of equity of 6.6%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= €44m÷ ( 1 + 6.6%)10= €23m
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is €44m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of €8.7, the company appears about fair value at a 19% 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.
XTRA:K1R Discounted Cash Flow March 4th 2023
The Assumptions
We would point out that 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 evaluation of a company's future performance, so try the calculation yourself and check your own 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 KROMI Logistik 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 6.6%, which is based on a levered beta of 1.087. 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 KROMI Logistik
Strength
Earnings growth over the past year exceeded its 5-year average.
Debt is well covered by cash flow.
Weakness
Earnings growth over the past year underperformed the Trade Distributors industry.
Interest payments on debt are not well covered.
Opportunity
Current share price is below our estimate of fair value.
Lack of analyst coverage makes it difficult to determine K1R's earnings prospects.
Threat
No apparent threats visible for K1R.
Looking Ahead:
Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For KROMI Logistik, we've put together three essential items you should further research:
Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
Other Top Analyst Picks: Interested to see what the analysts are thinking? Take a look at our interactive list of analysts' top stock picks to find out what they feel might have an attractive future outlook!
PS. Simply Wall St updates its DCF calculation for every German stock every day, so if you want to find the intrinsic value of any other stock just search here.
Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
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