Estimate of fair value of SSAB AB (publ) (STO:SSAB A)

Key findings

• Using the dividend discount model, the fair value of SSAB is estimated at SEK 49.19.
• With a share price of 58.18 krone, SSAB appears to be trading close to its estimated fair value
• The analyst price target of 76.93 krone for SSAB A is 56% above our fair value estimate

Does the July share price of SSAB AB (publ) (STO:SSAB A) reflect its actual value? Today we will estimate the intrinsic value of the stock by taking the expected future cash flows and discounting them to their present value. This is done using the Discounted Cash Flow (DCF) model. Believe it or not, it’s not too difficult to follow, as you’ll see from our example!

Companies can be valued in many ways, so we want to point out that a DCF is not perfect for every situation. 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 SSAB

Is SSAB fairly valued?

We need to calculate SSAB’s value a little differently than other stocks because it’s a metals and mining 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). Unless a company pays out the majority of its free cash flow as dividends, this method will typically underestimate the stock’s value. We use the Gordon Growth Model, which assumes the dividend will grow 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 1.0%. We then discount this figure to today’s value at a cost of equity of 7.0%. Compared to the current share price of kr58.2, the company seems to be around fair value at the time of writing. However, valuations are imprecise tools, much like a telescope – move a few degrees and you end up in another galaxy. Keep this in mind.

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

= kr3.0 / (7.0% – 1.0%)

= 49.2 kr

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 SSAB 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 7.0%, which is based on a leveraged beta of 1.315. 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 SSAB

Go on:

Valuation is only one side of the coin when building 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. 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. For example, changes in the company’s cost of equity or risk-free rate can significantly affect valuation. For SSAB, there are three relevant points to consider:

1. Risks: For example, we found 2 warning signs for SSAB (1 should not be ignored!) that you need to consider before investing here.
2. Future income: How does SSAB A’s growth rate compare 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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