Valmet Oyj (HEL:VALMT) shares could be 46% below their estimated intrinsic value

Key findings

• The forecast fair value for Valmet Oyj is €49.46 based on the 2-step Free Cash Flow to Equity
• Valmet Oyj’s share price of €26.69 suggests the company could be undervalued by 46%
• The analyst price target of €30.14 for VALMT is 39% below our fair value estimate

How far is Valmet Oyj (HEL:VALMT) from its intrinsic value? Using the most recent financial data, we will examine whether the stock is fairly valued. To do this, we will take the company’s forecast future cash flows and discount them to today’s value. Our analysis will use the Discounted Cash Flow (DCF) model. Before you think you can’t understand it, just keep reading! It’s actually a lot less complex than you think.

We generally believe that the value of a company is the present value of all the cash it will generate in the future. However, a DCF is just one valuation metric among many and is not without its flaws. For those who enjoy stock analysis, the Simply Wall St analysis model presented here might be of interest.

Check out our latest analysis for Valmet Oyj

What is the estimated value?

We use a two-stage DCF model which, as the name suggests, considers two stages of growth. The first stage is generally a period of higher growth that stabilizes towards the terminal value, which is captured in the second stage of “steady growth”. The first stage requires us to estimate the company’s cash flows for the next ten years. Where possible, we use analyst estimates, but when these aren’t 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 discount the value of these future cash flows to their estimated value in today’s dollars:

10-year free cash flow (FCF) forecast

(“Est” = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = 3.9 billion euros

The second phase is also called the terminal value, which is the company’s cash flow after the first phase. 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 1.0%. We discount the terminal cash flows to today’s value at a cost of equity of 7.2%.

Final value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = €641 million × (1 + 1.0%) ÷ (7.2% – 1.0%) = €11 billion

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= €11 billion ÷ (1 + 7.2%)¹⁰= 5.3 billion euros

The total value or equity value is then the sum of the present value of future cash flows, which in this case is €9.1 billion. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of €26.7, the company appears quite valuable at a 46% 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.

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. 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 Valmet Oyj 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 7.2%, which is based on a leveraged beta of 1.189. 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 Valmet Oyj

Looking ahead:

Although a company’s valuation is important, ideally it should not be the only analysis you look at for a company. It is not possible to get a foolproof valuation using a DCF model. Rather, it should be viewed 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 the valuation. What is the reason for the share price to be below the intrinsic value? For Valmet Oyj, we have compiled three essential elements to consider:

1. Risks: A typical example: We discovered 2 warning signals for Valmet Oyj You should be aware.
2. management:Have insiders increased their shares to capitalize on market sentiment regarding VALMT’s future prospects? Check out our management and board analysis with insights into CEO compensation and governance factors.
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 Finnish 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 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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