NP3 Fastigheter AB (publ) (STO:NP3) Investors Are Paying Above The Intrinsic Value

Scott Perkins

Mon, Feb 18, 2019, 12:28 AM

Does the February share price for NP3 Fastigheter AB (publ) (STO:NP3) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value by projecting its future cash flows and then discounting them to today’s value. I will be using the discounted cash flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. Anyone interested in learning a bit more about intrinsic value should have a read of 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 NP3 Fastigheter by following the link below.

Check out our latest analysis for NP3 Fastigheter

What’s the value?

I use what is known as a 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the first stage is higher growth, and the second stage is a more stable growth phase. 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)	SEK93.20	SEK188.60	SEK222.55	SEK260.38	SEK302.04
Source	Analyst x1	Analyst x1	Est @ 18%, capped from 30.56%	Est @ 17%, capped from 30.56%	Est @ 16%, capped from 30.56%
Present Value Discounted @ 9.49%	SEK85.12	SEK157.32	SEK169.55	SEK181.17	SEK191.95

Present Value of 5-year Cash Flow (PVCF)= kr785m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after the five years. For a number of reasons a very conservative growth rate is used that cannot exceed that of the GDP. In this case I have used the 10-year government bond rate (0.4%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 9.5%.

Terminal Value (TV) = FCF₂₀₂₃ × (1 + g) ÷ (r – g) = kr302m × (1 + 0.4%) ÷ (9.5% – 0.4%) = kr3.3b

Present Value of Terminal Value (PVTV) = TV / (1 + r)⁵ = kr3.3b ÷ ( 1 + 9.5%)⁵ = kr2.1b

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 kr2.9b. 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 SEK53.62. Compared to the current share price of SEK68.5, the stock is fair value, maybe slightly overvalued and not available at a discount at this time.

OM:NP3 Intrinsic Value Export February 18th 19

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 NP3 Fastigheter 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 9.5%, which is based on a levered beta of 0.947. 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:

Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For NP3, I’ve compiled three important factors you should further research:

Financial Health: Does NP3 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 NP3’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 NP3? 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 for every stock on the STO every 6 hours. If you want to find the calculation for other stocks just search here.

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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. On rare occasion, data errors may occur. Thank you for reading.