Calculating The Intrinsic Value Of Hapag-Lloyd Aktiengesellschaft (ETR:HLAG)

editorial-team@simplywallst.com (Simply Wall St)

Thu, Jan 23, 2025, 11:55 PM 6 min read

How far off is Hapag-Lloyd Aktiengesellschaft (ETR:HLAG) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by estimating the company's future cash flows and discounting them to their present value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!

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.

Check out our latest analysis for Hapag-Lloyd

The Model

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 begin with, we have to get estimates of the next ten years of cash flows. 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.

Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (€, Millions)	€1.09b	€1.37b	€1.19b	€1.08b	€1.02b	€977.3m	€953.2m	€939.5m	€932.8m	€930.8m
Growth Rate Estimate Source	Analyst x2	Analyst x2	Est @ -13.30%	Est @ -9.02%	Est @ -6.03%	Est @ -3.93%	Est @ -2.46%	Est @ -1.44%	Est @ -0.72%	Est @ -0.21%
Present Value (€, Millions) Discounted @ 5.0%	€1.0k	€1.2k	€1.0k	€892	€798	€731	€679	€637	€603	€573

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = €8.2b

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. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (1.0%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 5.0%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = €931m× (1 + 1.0%) ÷ (5.0%– 1.0%) = €23b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= €23b÷ ( 1 + 5.0%)¹⁰= €14b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is €23b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of €133, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf — XTRA:HLAG Discounted Cash Flow January 24th 2025

Important Assumptions

Now 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 inputs, I recommend redoing the calculations yourself and playing with them. 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 Hapag-Lloyd 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 5.0%, which is based on a levered beta of 0.974. 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 Hapag-Lloyd

Strength

Debt is not viewed as a risk.

Dividend is in the top 25% of dividend payers in the market.

Weakness

Earnings declined over the past year.

Expensive based on P/E ratio and estimated fair value.

Opportunity

HLAG's financial characteristics indicate limited near-term opportunities for shareholders.

Threat

Dividends are not covered by earnings and cashflows.

Annual earnings are forecast to decline for the next 4 years.

Next Steps:

Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Hapag-Lloyd, we've put together three further factors you should explore:

Risks: For instance, we've identified 4 warning signs for Hapag-Lloyd (2 don't sit too well with us) you should be aware of.
Future Earnings: How does HLAG'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: 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!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the XTRA every day. If you want to find the calculation for other stocks just search here.

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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.