Does Agilyx ASA (OB:AGLX) stock price in October reflect what it is really worth? Today we are going to estimate the intrinsic value of the stock by taking the expected future cash flows and discounting them to their present value. One way to do this is to use the discounted cash flow (DCF) model. Don’t be put off by the jargon, the underlying calculations are actually quite simple.
Remember though that there are many ways to estimate the value of a business and a DCF is just one method. If you still have burning questions about this type of assessment, take a look at Simply Wall St.’s analysis template.
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The model
We will use a two-stage DCF model which, as the name suggests, takes into account two stages of growth. The first stage is usually a period of higher growth which stabilizes towards the terminal value, captured in the second period of “sustained growth”. To begin with, we need to obtain cash flow estimates for the next ten years. Wherever possible, we use analysts’ estimates, but where these are not available, we extrapolate the previous free cash flow (FCF) from the latest estimate or reported value. We assume that companies with decreasing free cash flow will slow their rate of contraction and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow more in early years than in later years.
A DCF is based on 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:
10-Year Free Cash Flow (FCF) Forecast
2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | |
Leveraged FCF ($, millions) | -USD 7.00m | -1.50m USD | US$2.00m | $3.14 million | $4.40 million | $5.66 million | $6.81 million | $7.80 million | $8.62 million | US$9.29m |
Growth rate estimate Source | Analyst x2 | Analyst x2 | Analyst x1 | Is at 57% | Is at 40.24% | Is at 28.51% | East @ 20.3% | Is at 14.55% | Is at 10.53% | Is at 7.71% |
Present value (millions of dollars) discounted at 5.3% | -$6.7 | -$1.4 | $1.7 | $2.6 | $3.4 | $4.2 | $4.8 | $5.2 | $5.4 | $5.6 |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = $24 million
The second stage is also known as the terminal value, it is the cash flow of the business after the first stage. For a number of reasons, a very conservative growth rate is used which cannot exceed that of a country’s GDP growth. In this case, we used the 5-year average of the 10-year government bond yield (1.1%) to estimate future growth. Similar to the 10-year “growth” period, we discount future cash flows to present value, using a cost of equity of 5.3%.
Terminal value (TV)= FCF_{2032} × (1 + g) ÷ (r – g) = $9.3 million × (1 + 1.1%) ÷ (5.3%–1.1%) = $228 million
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= $228 million ÷ (1 + 5.3%)^{ten}= $137 million
The total value, or equity value, is then the sum of the present value of future cash flows, which in this case is $161 million. The final step is to divide the equity value by the number of shares outstanding. Compared to the current share price of 25.1 kr, the company appears slightly overvalued at the time of writing. Remember though that this is only a rough estimate, and like any complex formula – trash in, trash out.
The hypotheses
Now, the most important inputs to a discounted cash flow are the discount rate and, of course, the actual cash flows. If you disagree with these results, try the math yourself and play around with the assumptions. The DCF also does not take into account the possible cyclicality of an industry, nor the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we view Agilyx 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 factors in debt. In this calculation, we used 5.3%, which is based on a leveraged beta of 0.880. Beta is a measure of a stock’s volatility relative to the market as a whole. We derive our beta from the average industry beta of broadly comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
SWOT analysis for Agilyx
- Debt is well covered by income.
- Expensive based on P/S ratio and estimated fair value.
- Shareholders have been diluted over the past year.
- Forecast to reduce losses next year.
- Significant insider buying in the last 3 months.
- Debt is not well covered by operating cash flow.
- Has less than 3 years of cash trail based on current free cash flow.
Look forward:
Although a business valuation is important, it is only one of many factors you need to assess for a business. The DCF model is not a perfect stock valuation tool. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company’s cost of equity or the risk-free rate can have a significant impact on the valuation. Can we understand why the company is trading at a premium to its intrinsic value? For Agilyx, we’ve put together three relevant factors you should consider:
- Risks: We believe that you should evaluate the 1 warning sign for Agilyx we reported before investing in the company.
- Future earnings: How does AGLX’s growth rate compare to its peers and the market in general? Dive deeper into the analyst consensus figure for the coming years by interacting with our free analyst growth forecast chart.
- Other high-quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality actions to get an idea of what you might be missing!
PS. Simply Wall St updates its DCF calculation for every Norwegian stock daily, so if you want to find the intrinsic value of any other stock, just search here.
Valuation is complex, but we help make it simple.
Find out if Agilix is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.