Kendrion NV (AMS:KENDR) Investors Are Paying Above The Intrinsic Value

Audra Newberry

Updated Mon, Sep 24, 2018, 3:11 AM

How far off is Kendrion NV (AMS:KENDR) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to their present value. I will use the discounted cash flows (DCF) model. It may sound complicated, but actually it is quite simple! Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. If you are reading this and its not September 2018 then I highly recommend you check out the latest calculation for Kendrion by following the link below.

Check out our latest analysis for Kendrion

Is KENDR fairly valued?

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second ‘steady growth’ period. To begin with we have to get estimates of the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount this to its value today and sum up the total to get the present value of these cash flows.

5-year cash flow estimate

	2019	2020	2021	2022	2023
Levered FCF (€, Millions)	€23.12	€27.30	€28.93	€30.65	€32.48
Source	Analyst x1	Analyst x1	Est @ 5.97%	Est @ 5.97%	Est @ 5.97%
Present Value Discounted @ 9.87%	€21.04	€22.62	€21.81	€21.04	€20.29

Present Value of 5-year Cash Flow (PVCF)= €106.8m

The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 0.7%. We discount this to today’s value at a cost of equity of 9.9%.

Terminal Value (TV) = FCF₂₀₂₂ × (1 + g) ÷ (r – g) = €32.5m × (1 + 0.7%) ÷ (9.9% – 0.7%) = €357.2m

Present Value of Terminal Value (PVTV) = TV / (1 + r)⁵ = €357.2m ÷ ( 1 + 9.9%)⁵ = €223.1m

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is €329.9m. In the final step we divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) or ADR then we use the equivalent number. This results in an intrinsic value of €24.63. Relative to the current share price of €30.35, the stock is fair value, maybe slightly overvalued and not available at a discount at this time.

ENXTAM:KENDR Intrinsic Value Export September 24th 18

Important assumptions

Now 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 my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Kendrion as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 9.9%, which is based on a levered beta of 0.986. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Next Steps:

Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For KENDR, I’ve put together three pertinent aspects you should further examine:

Financial Health: Does KENDR have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
Future Earnings: How does KENDR’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 High Quality Alternatives: Are there other high quality stocks you could be holding instead of KENDR? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. The Simply Wall St app conducts a discounted cash flow for every stock on the AMS every 6 hours. If you want to find the calculation for other stocks just search here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

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