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In this article I am going to calculate the intrinsic value of Endomines AB (publ) (STO:ENDO) by estimating the company’s future cash flows and discounting them to their present value. I will be 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 February 2019 then I highly recommend you check out the latest calculation for Endomines by following the link below.
See our latest analysis for Endomines
Step by step through the calculation
I’m 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 perpetual stable growth rate. In the first stage we need to estimate the cash flows to the business over the next five years. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount the sum of these cash flows to arrive at a present value estimate.
5-year cash flow estimate
| 2019 | 2020 | 2021 | 2022 | 2023 | |
| Levered FCF (SEK, Millions) | SEK-90.00 | SEK-153.00 | SEK-15.00 | SEK151.00 | SEK210.00 |
| Source | Analyst x1 | Analyst x1 | Analyst x1 | Analyst x1 | Analyst x1 |
| Present Value Discounted @ 19.57% | SEK-75.27 | SEK-107.02 | SEK-8.78 | SEK73.88 | SEK85.94 |
Present Value of 5-year Cash Flow (PVCF)= -kr31.2m
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 0.4%. We discount this to today’s value at a cost of equity of 19.6%.
Terminal Value (TV) = FCF2023 × (1 + g) ÷ (r – g) = kr210m × (1 + 0.4%) ÷ (19.6% – 0.4%) = kr1.1b
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = kr1.1b ÷ ( 1 + 19.6%)5 = kr451m
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 kr420m. To get the intrinsic value per share, we divide this by the total number of shares outstanding, or the equivalent number if this is a depositary receipt or ADR. This results in an intrinsic value of SEK11.86. Relative to the current share price of SEK7.2, the stock is quite undervalued at a 39% discount to what it is available for right now.