Estimating the intrinsic value of LEM Holding SA (VTX:LEHN)

Key findings

• The forecast fair value for LEM Holding is CHF1.689 based on the 2-step Free Cash Flow to Equity
• LEM Holding’s share price of CHF 1,424 suggests that it is trading at a similar level to its estimated fair value.
• Our fair value estimate is 13% below LEM Holding’s analyst price target of CHF 1,951.

How far is LEM Holding SA (VTX:LEHN) from its intrinsic value? Using the most recent financial data, we will check if the stock is fairly valued by discounting the company’s forecast future cash flows to today’s value. The Discounted Cash Flow (DCF) model is the tool we will use for this. There’s actually not too much to do with it, even though it may seem quite complex.

We would like to point out that there are many ways to value a company and that each method, like the DCF, has advantages and disadvantages in certain scenarios. If you still have questions about this type of valuation, take a look at Simply Wall St’s analysis model.

Check out our latest analysis for LEM Holding

The calculation

We use the two-stage growth model, which simply means that we consider two stages of the company’s growth. In the early stage, the company might have a higher growth rate, and in the second stage, a stable growth rate is usually assumed. First, we need to estimate the next ten years’ cash flows. Where possible, we use analyst estimates, but when these are not available, we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume that companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will slow their growth rate, over this period. We do this to take into account that growth tends to slow more in the early years than in later years.

In general, we assume that a dollar today is worth more than a dollar in the future. Therefore, we need to discount the sum of these future cash flows to arrive at an estimate of present value:

10-year free cash flow (FCF) forecast

(“Est” = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = CHF 679 million

We now need to calculate the terminal value that takes into account all future cash flows after this ten-year period. The Gordon growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average of the 10-year Treasury yield of 0.2%. We discount the terminal cash flows to today’s value at a cost of equity of 5.3%.

Final value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = 106 million CHF × (1 + 0.2 %) ÷ (5.3 % – 0.2 %) = 2.1 billion CHF

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= CHF 2.1 billion ÷ (1 + 5.3%)¹⁰= 1.2 billion francs

Total value is the sum of the next ten years’ cash flows plus the discounted terminal value, which gives the total equity value, which in this case is CHF 1.9 billion. The final step is to divide the equity value by the number of shares outstanding. Compared to the current share price of CHF 1.4k, the company appears to be about fair value at a 16% discount to the current share price. However, valuations are imprecise instruments, much like a telescope – move a few degrees and you end up in another galaxy. Keep this in mind.

The assumptions

We would like to point out that the key inputs to a discounted cash flow are the discount rate and of course the actual cash flows. Part of investing is making your own assessment of a company’s future performance, so try the calculation yourself and check your own assumptions. DCF also does not take into account the possible cyclicality of an industry or a company’s future capital needs and therefore does not provide a complete picture of a company’s potential performance. Since we consider LEM Holding 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 takes debt into account. In this calculation, we used 5.3%, which is based on a leveraged beta of 1.109. Beta is a measure of a stock’s volatility relative to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with a set limit between 0.8 and 2.0, which is a reasonable range for a stable company.

SWOT analysis for LEM Holding

Next Steps:

Valuation is only one side of the coin when developing your investment thesis and ideally should not be the only analysis you look at for a company. DCF models are not the be-all and end-all of investment valuation. You should preferably apply different cases and assumptions and see how they affect the valuation of the company. For example, if the terminal value growth rate is adjusted slightly, it can change the overall result dramatically. For LEM Holding, we have compiled three basic aspects that you should evaluate:

1. Risks: We think you should 2 warning signals for LEM Holding We indicated this before investing in the company.
2. Future income: How is LEHN’s growth rate compared to competitors and the overall market? Learn more about analyst consensus numbers for the coming years by using our free chart of analyst growth expectations.
3. Other solid companies: Low debt, high returns on equity, and good past performance are the foundation of a strong company. Check out our interactive list of stocks with solid business fundamentals to see if there are any other companies you may not have considered!

PS. Simply Wall St updates its DCF calculation for each Swiss stock daily, so if you want to find out the intrinsic value of another stock, just search here.

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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.

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