Fair value calculation of Thule Group AB (publ) (STO:THULE)

Key findings

• The forecast fair value for Thule Group is 329 kr based on the 2-step free cash flow to equity
• The current share price of 279 krone suggests that Thule Group may be trading close to its fair value.
• The analysts’ price target of 313 kr for THULE is 4.8% below our fair value estimate

In this article, we will estimate the intrinsic value of Thule Group AB (publ) (STO:THULE) by estimating the company’s future cash flows and discounting them to their present value. This is done using the Discounted Cash Flow (DCF) model. It doesn’t actually take too much to do, even though it may seem quite complex.

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 Thule Group

Is the Thule Group fairly valued?

We use the 2-stage growth model, which simply means that we consider two stages of company 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’ worth of 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 down more in the early years than in later years.

A DCF is all about the idea that a dollar in the future is worth less than a dollar today. So we discount the value of these future cash flows to their estimated value in today’s dollars:

Estimation of free cash flow (FCF) over 10 years

(“Est” = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = kr13b

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 1.0%. We discount the terminal cash flows to today’s value at a cost of equity of 5.8%.

Final value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = kr1.8b × (1 + 1.0 %) ÷ (5.8 % – 1.0 %) = kr39b

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= kr39b÷ ( 1 + 5.8 %)¹⁰= kr22b

The total value is the sum of the next ten years’ cash flows plus the discounted terminal value, which gives the total value of equity, which in this case is 35 billion krone. In the final step, we divide the equity value by the number of shares issued. Relative to the current share price of 279 krone, the company appears roughly fairly valued at a 15% discount to the current share price. However, keep in mind that this is only an approximate valuation and as with any complex formula, where garbage comes in, garbage comes out.

The assumptions

The above calculation relies heavily on two assumptions. The first is the discount rate and the other is 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 are considering Thule Group 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 5.8%, which is based on a leveraged beta of 1.046. 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 a set limit between 0.8 and 2.0, which is a reasonable range for a stable company.

SWOT analysis for the Thule Group

Looking ahead:

While a company’s valuation is important, it is only one of many factors you need to evaluate a company. It is not possible to get a foolproof valuation using a DCF model. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to an undervaluation or overvaluation of the company. If a company grows differently, or its cost of equity or risk-free rate changes significantly, the outcome could be very different. For Thule Group, there are three basic aspects you should examine:

1. Risks: For example, we found 2 warning signs for the Thule Group that you need to consider before investing here.
2. Future income: How is THULE’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: 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 Swedish 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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