Estimating The Intrinsic Value Of DSM-Firmenich AG (AMS:DSFIR)

editorial-team@simplywallst.com (Simply Wall St)

Wed, Dec 27, 2023, 12:22 AM 6 min read

How far off is DSM-Firmenich AG (AMS:DSFIR) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the forecast future cash flows of the company and discounting them back to today's value. This will be done using the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

View our latest analysis for DSM-Firmenich

Is DSM-Firmenich Fairly Valued?

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

Generally we assume that a dollar today is more valuable 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

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (€, Millions)	€1.00b	€1.20b	€1.49b	€1.56b	€1.61b	€1.65b	€1.69b	€1.71b	€1.73b	€1.75b
Growth Rate Estimate Source	Analyst x9	Analyst x9	Analyst x4	Analyst x3	Est @ 3.22%	Est @ 2.45%	Est @ 1.91%	Est @ 1.53%	Est @ 1.27%	Est @ 1.08%
Present Value (€, Millions) Discounted @ 5.9%	€948	€1.1k	€1.3k	€1.2k	€1.2k	€1.2k	€1.1k	€1.1k	€1.0k	€992

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = €11b

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (0.6%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 5.9%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = €1.8b× (1 + 0.6%) ÷ (5.9%– 0.6%) = €34b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= €34b÷ ( 1 + 5.9%)¹⁰= €19b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is €30b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of €91.4, the company appears about fair value at a 20% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf — ENXTAM:DSFIR Discounted Cash Flow December 27th 2023

The Assumptions

We would point out 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 inputs, I recommend redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at DSM-Firmenich 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 accounts for debt. In this calculation we've used 5.9%, which is based on a levered beta of 1.041. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

SWOT Analysis for DSM-Firmenich

Strength

Net debt to equity ratio below 40%.

Weakness

Dividend is low compared to the top 25% of dividend payers in the Chemicals market.

Opportunity

Expected to breakeven next year.

Has sufficient cash runway for more than 3 years based on current free cash flows.

Current share price is below our estimate of fair value.

Threat

Debt is not well covered by operating cash flow.

Dividends are not covered by cash flow.

Moving On:

Although the valuation of a company is important, it is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. Instead the best use for 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 significantly impact the valuation. For DSM-Firmenich, there are three pertinent aspects you should further examine:

Risks: We feel that you should assess the 1 warning sign for DSM-Firmenich we've flagged before making an investment in the company.
Future Earnings: How does DSFIR's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
Other Solid Businesses: 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 business fundamentals to see if there are other companies you may not have considered!

PS. Simply Wall St updates its DCF calculation for every Dutch stock every day, so if you want to find the intrinsic value of any other stock just search here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.