In This Article:
In this article I am going to calculate the intrinsic value of Kid ASA (OB:KID) using the discounted cash flows (DCF) model. If you want to learn more about this method, the basis for my calculations can be found in detail in the Simply Wall St analysis model. Also note that this article was written in April 2018 so be sure check the latest calculation for Kid here.
Crunching the numbers
We are going to use a two-stage DCF model, which takes into account the initial higher growth stage of a company’s life cycle and the steadier growth phase over the long run. Firstly, I pulled together the analyst consensus forecast of KID’s levered free cash flow (FCF) over the next five years and discounted these figures at the rate of 9.45%. When estimates weren’t available, I’ve extrapolated the average annual growth rate over the previous five years, capped at a reasonable level. This resulted in a present value of 5-year cash flow of ØRE664.50M. Keen to understand how I calculated this value? Take a look at our detailed analysis here.
Above is a visual representation of how KID’s earnings are expected to move in the future, which should give you an idea of KID’s outlook. Secondly, I determine the terminal value, which accounts for all the future cash flows after the five years. I’ve decided to use the 10-year government bond rate of 2.8% as the stable growth rate, which is rightly below GDP growth, but more towards the conservative side. After discounting the terminal value back five years, the present value becomes ØRE1.74B.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is ØRE2.41B. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of NOK59.26, which, compared to the current share price of NOK38.6, we see that Kid is quite good value at a 34.86% discount to what it is available for right now.
Next Steps:
Whilst important, DCF calculation 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 KID, I’ve put together three fundamental aspects you should further research:
-
Financial Health: Does KID 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 KID’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 KID? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!