A look at the fair value of Vow ASA (OB:VOW)

Key findings

• Using the dividend discount model, the fair value of Vow is 5.65 kr
• The current share price of 6.61 krone suggests that Vow may be trading close to its fair value
• The average discount at Vows competitors is currently 27%

In this article, we will estimate the intrinsic value of Vow ASA (OB:VOW) by taking the company’s projected future cash flows and discounting them to today’s value. The Discounted Cash Flow (DCF) model is the tool we will use to do this. It doesn’t actually take too much to do, 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 DCF, has advantages and disadvantages in certain scenarios. If you want to learn more about discounted cash flow, you can read the basics of this calculation in detail in Simply Wall St’s analysis model.

Check out our latest analysis for Vow

What is the estimated value?

We need to calculate Vow’s value a little differently than other stocks because it’s a commercial services company. Rather than using free cash flows, which are difficult to estimate and often unreported by analysts in this industry, we use dividend payments per share (DPS). This often underestimates a stock’s value, but can still be good as a comparison to competitors. We use the Gordon Growth Model, which assumes the dividend grows at a sustainable rate over time. The dividend is expected to grow at an annual growth rate equal to the 5-year average 10-year government bond yield of 2.1%. We then discount this figure to today’s value at a cost of equity of 6.6%. Compared to the current share price of kr 6.6, the company seems to be around fair value at the time of writing. However, keep in mind that this is only an approximate valuation and as with any complex formula, where there’s garbage in, there’s garbage out.

Value per share = Expected dividend per share / (Discount rate – Perpetual growth rate)

= kr0.3 / (6.6% – 2.1%)

= kr5,6

Important assumptions

The above calculation relies heavily on two assumptions. The first is the discount rate and the other is the cash flows. You don’t have to agree with these inputs, I recommend repeating the calculations yourself and playing with them. The DCF also doesn’t take into account the possible cyclicality of an industry or a company’s future capital needs and therefore doesn’t provide a complete picture of a company’s potential performance. Since we consider Vow 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 6.6% which is based on a leveraged beta of 0.973. Beta is a measure of a stock’s volatility relative to the overall market. We get our beta from the industry average beta of globally comparable companies with an imposed limit of between 0.8 and 2.0 which is a reasonable range for a stable company.

SWOT Analysis for Vow

Looking ahead:

Valuation is only one side of the coin when building your investment thesis and only one of many factors you need to evaluate for a company. The DCF model is not a perfect tool for stock valuation. It should be viewed more as a guide to “what assumptions need to hold for this stock to be under/overvalued”. For example, changes in the company’s cost of equity or risk-free interest rate can significantly affect valuation. For Vow, there are three relevant factors you should examine:

1. Risks: We think you should 3 warning signs for Vow (1 makes us a little uncomfortable!) that we highlighted before investing in the company.
2. Future income: How does VOW’s growth rate compare to its 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 high-quality alternatives: Like a good all-rounder? Explore our interactive list of high-quality stocks to get a sense of what else you might be missing out on!

PS. Simply Wall St updates its DCF calculation for each Norwegian 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 based solely on 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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