【meatloaf with tvp】Investors Are Undervaluing Fellow Finance Oyj (HEL:FELLOW) By 46.67%

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How far off is Fellow Finance Oyj (

HEL:FELLOW

) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced by projecting its future cash flows and then discounting them to today’s value. This is done using the discounted cash flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. 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

. Please also note that this article was written in February 2019 so be sure check out the updated calculation by following the link below.

See our latest analysis for Fellow Finance Oyj

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. 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. I then discount this to its value today and sum up the total to get the present value of these cash flows.

5-year cash flow estimate

2019

2020

2021

2022

2023

Levered FCF (€, Millions)

€1.75

€2.55

€3.20

€6.50

€10.40

Source

Analyst x2

Analyst x2

Analyst x2

Analyst x2

Analyst x2

Present Value Discounted @ 9.03%

€1.61

€2.15

€2.47

€4.60

€6.75

Present Value of 5-year Cash Flow (PVCF)

= €18m

After calculating the present value of future cash flows in the intial 5-year period we need to calculate the Terminal Value, which accounts for all the future cash flows beyond the first stage. 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 (0.5%). 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%.

Terminal Value (TV)

= FCF

2023

× (1 + g) ÷ (r – g) = €10m × (1 + 0.5%) ÷ (9% – 0.5%) = €123m

Present Value of Terminal Value (PVTV)

= TV / (1 + r)

5

= €123m ÷ ( 1 + 9%)

5

= €80m

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 €98m. In the final step we divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) or ADR then we use the equivalent number.

This results in an intrinsic value of €13.69

. Compared to the current share price of €7.3, the stock is quite undervalued at a 47% discount to what it is available for right now.

Story continues

HLSE:FELLOW Intrinsic Value Export February 1st 19

Important assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual 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 Fellow Finance Oyj 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%, which is based on a levered beta of 0.897. 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 FELLOW, there are three pertinent aspects you should look at:

Financial Health

: Does FELLOW 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 FELLOW’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 FELLOW? 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 HEL every 6 hours. If you want to find the calculation for other stocks just

search here

.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at

[email protected]

.

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