A look at the fair value of Metsä Board Oyj (HEL: METSB)


How far is Metsä Board Oyj (HEL: METSB) from its intrinsic value? Using the most recent financial data, we’ll examine whether the stock price is fair by taking expected future cash flows and discounting them to today’s value. One way to do this is to use the Discounted Cash Flow (DCF) model. It may sound complicated, but it’s actually quite simple!

We draw your attention to the fact that there are many ways to assess a business and, like DCF, each technique has advantages and disadvantages in certain scenarios. If you want to know more about discounted cash flow, the rationale for this calculation can be read in detail in the Simply Wall St analysis model.

See our latest review for Metsä Board Oyj

Crunch the numbers

We use what is called a two-step model, which simply means that we have two different periods of growth rate for the cash flow of the business. Usually the first stage is higher growth, and the second stage is lower growth stage. To begin with, we need to estimate the next ten years of cash flow. 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 stated 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 down more in the early years than in subsequent years.

Generally, we assume that a dollar today is worth more than a dollar in the future, and so the sum of these future cash flows is then discounted to today’s value:

10-year Free Cash Flow (FCF) estimate

2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Leverage FCF (€, Millions) € 92.0m 148.8 M € € 165.0m 190.0 M € 207.4 M € € 220.7m 230.8 M € € 238.3m € 243.9m € 248.0 M
Source of estimated growth rate Analyst x3 Analyst x4 Analyst x1 Analyst x1 Est @ 9.13% Is 6.45% Is 4.57% East @ 3.26% East @ 2.34% Est @ 1.69%
Present value (€, Millions) discounted at 7.5% € 85.6 € 129 € 133 € 142 € 144 143 € € 139 € 134 € 127 € 120

(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = € 1.3 billion

After calculating the present value of future cash flows over the initial 10 year period, we need to calculate the terminal value, which takes into account all future cash flows beyond the first step. 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 government bond yield of 0.2%. We discount the terminal cash flows to their present value at a cost of equity of 7.5%.

Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = € 248m × (1 + 0.2%) ÷ (7.5% – 0.2%) = € 3.4bn

Present value of terminal value (PVTV)= TV / (1 + r)ten= € 3.4bn ÷ (1 + 7.5%)ten= 1.6 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 € 2.9 billion. To get the intrinsic value per share, we divide it by the total number of shares outstanding. Compared to the current stock price of € 8.7, the company appears to be around fair value at the time of writing. Ratings are imprecise instruments, however, much like a telescope – move a few degrees and end up in another galaxy. Keep this in mind.

HLSE: METSB Discounted cash flow on December 12, 2021

The hypotheses

We draw your attention to the fact that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. You don’t have to agree with these entries, I recommend that you redo the calculations yourself and play around with them. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a full picture of a company’s potential performance. Since we consider Metsä Board Oyj to be a potential shareholder, 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 7.5%, which is based on a leveraged beta of 1.553. Beta is a measure of the volatility of a stock relative to the market as a whole. We get our industry average beta from comparable companies globally, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Move on :

While important, calculating DCF shouldn’t be the only metric you look at when looking for a business. The DCF model is not a perfect equity valuation tool. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under / overvalued?” For example, if the terminal value growth rate is adjusted slightly, it can dramatically change the overall result. For Metsä Board Oyj, there are three relevant factors that you should research further:

  1. Risks: Take risks, for example – Metsä Board Oyj a 2 warning signs (and 1 which is a little worrying) we think you should be aware of.
  2. Future benefits: How does METSB’s growth rate compare to that of its peers and the broader market? Dig deeper into the analyst consensus number for years to come by interacting with our free analyst growth expectations chart.
  3. Other strong companies: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid trading fundamentals to see if there are other companies you may not have considered!

PS. The Simply Wall St app performs a daily discounted cash flow assessment for each HLSE share. If you want to find the calculation for other actions, just search here.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.


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