A Look At The Fair Value Of Senioresidenz AG (BRN:SENIO)
editorial-team@simplywallst.com (Simply Wall St)
6 min read
Key Insights
The projected fair value for Senioresidenz is CHF24.44 based on 2 Stage Free Cash Flow to Equity
With CHF28.00 share price, Senioresidenz appears to be trading close to its estimated fair value
Industry average of 98% suggests Senioresidenz's peers are currently trading at a higher premium to fair value
Today we will run through one way of estimating the intrinsic value of Senioresidenz AG (BRN:SENIO) by projecting its future cash flows and then discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. It may sound complicated, but actually it is quite simple!
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
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 ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last 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.
A DCF is all about the idea that a dollar in the future is less valuable 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) estimate
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
Levered FCF (CHF, Millions)
CHF5.56m
CHF5.39m
CHF5.28m
CHF5.20m
CHF5.14m
CHF5.11m
CHF5.08m
CHF5.06m
CHF5.05m
CHF5.04m
Growth Rate Estimate Source
Est @ -4.33%
Est @ -3.03%
Est @ -2.11%
Est @ -1.48%
Est @ -1.03%
Est @ -0.72%
Est @ -0.50%
Est @ -0.35%
Est @ -0.24%
Est @ -0.16%
Present Value (CHF, Millions) Discounted @ 8.2%
CHF5.1
CHF4.6
CHF4.2
CHF3.8
CHF3.5
CHF3.2
CHF2.9
CHF2.7
CHF2.5
CHF2.3
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = CHF35m
We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 (0.01%) 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 8.2%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CHF61m÷ ( 1 + 8.2%)10= CHF28m
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is CHF62m. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of CHF28.0, the company appears around fair value at the time of writing. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.
BRSE:SENIO Discounted Cash Flow October 14th 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 Senioresidenz 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 8.2%, which is based on a levered beta of 1.646. 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 Senioresidenz
Strength
Debt is well covered by earnings.
Dividend is in the top 25% of dividend payers in the market.
Weakness
Earnings declined over the past year.
Current share price is above our estimate of fair value.
Opportunity
SENIO's financial characteristics indicate limited near-term opportunities for shareholders.
Lack of analyst coverage makes it difficult to determine SENIO's earnings prospects.
Threat
Debt is not well covered by operating cash flow.
Moving On:
Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For Senioresidenz, we've put together three essential items you should further research:
Risks: Every company has them, and we've spotted 6 warning signs for Senioresidenz (of which 2 are a bit concerning!) you should know about.
Other High Quality Alternatives: Do you like a good all-rounder? 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 valuation for every stock on the BRSE every day. If you want to find the calculation for other stocks just search here.
Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
