A look at the fair value of Siegfried Holding AG (VTX:SFZN)

I’m going to explain to you how I calculated the intrinsic value of Siegfried Holding AG (VTX:SFZN) by taking the expected future cash flows and discounting them to today’s value. This is done using the Discounted Cash Flows (DCF) model. This may sound complicated, but it’s actually quite simple! Those who want to learn more about intrinsic value should check out Simply Wall St’s analysis model. Please also note that this article was written in June 2018, so be sure to check out the updated calculation by following the link below. Check out our latest analysis for Siegfried Holding

The calculation

I use the two-stage growth model, which simply means that we consider two stages of growth of the company. In the initial stage, the company may have a higher growth rate, and in the second stage, a stable growth rate is usually assumed over time. First, we need to get estimates of the next five years’ cash flows. When possible, I use analyst estimates, but when these are not available, I extrapolated the previous free cash flow (FCF) from the previous year. For this growth rate, I used the average annual growth rate over the past five years, but capped it at a reasonable level. Then, I discount the sum of these cash flows to get an estimate of the present value.

5-year cash flow estimate

Present value of 5-year cash flow (PVCF)= CHF 368.63 million

We now need to calculate the terminal value, which takes into account all future cash flows after the five years. For various reasons, a very conservative growth rate is used, which cannot exceed that of GDP. In this case, I have used the interest rate on 10-year Treasury bonds (3.7%). In the same way as with the 5-year “growth” period, we discount this to today’s value at a cost of equity of 9.4%.

Final value (TV) = FCF₂₀₂₂ × (1 + g) ÷ (r – g) = 134.77 million CHF × (1 + 3.7 %) ÷ (9.4 % – 3.7 %) = 2.48 billion CHF

Present value of terminal value (PVTV) = TV / (1 + r)⁵ = CHF 2.48 billion ÷ ( 1 + 9.4 %)⁵ = 1.58 billion francs

The total value is the sum of the cash flows for the next five years and the discounted terminal value, which gives the total value of equity, which in this case is CHF 1.95 billion. To get the intrinsic value per share, we divide it by the total number of shares issued, or the equivalent number if it is a depositary receipt or ADR. This results in an intrinsic value of CHF466.14Compared to the current share price of CHF 396, the stock is OK, perhaps even slightly undervalued, with a discount of 15.05% compared to the current price.

The assumptions

The above calculation heavily depends on two assumptions. The first is the discount rate and the other is the cash flows. If you disagree with my result, try the calculation yourself and play with the assumptions. Since we consider Siegfried Holding as potential shareholders, the cost of equity is used as the discount rate and not the cost of capital (or weighted average cost of capital, WACC) which takes debt into account. In this calculation, I used 9.4% which is based on a leveraged 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 company.

Next Steps:

Although important, the DCF calculation should not be the only metric you consider when researching a company.

For SFZN, I have compiled three key factors that you should examine in more detail:

1. Financial health: Does SFZN have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors such as debt and risk.

2. Future income: How is SFZN’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 high-quality alternatives: Are there other high-quality stocks you could hold instead of SFZN? Explore our interactive list of high-quality stocks to get an idea of ​​what else you might be missing out on!

PS. Simply Wall St runs a DCF calculation for every CH stock every 6 hours, so if you want to find out the intrinsic value of another stock, just search here.

To help readers look beyond the short-term volatility of the financial market, we aim to provide you with a long-term focused research analysis based solely on fundamental data. Please note that our analysis does not take into account the latest price-sensitive company announcements.

The author is an independent contributor and did not own any of the stocks mentioned at the time of publication.