A Look At The Intrinsic Value Of SGS SA (VTX:SGSN)

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Isabel Galloway

Updated Mon, Aug 20, 2018, 7:11 AM

Today I will be providing a simple run through of a valuation method used to estimate the attractiveness of SGS SA (VTX:SGSN) as an investment opportunity by taking the expected future cash flows and discounting them to their present value. I will use the discounted cash flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. 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 August 2018 then I highly recommend you check out the latest calculation for SGS by following the link below.

Check out our latest analysis for SGS

Is SGSN fairly valued?

I use what is known as a 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the first stage is higher growth, and the second stage is a more stable growth phase. 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 the sum of these cash flows to arrive at a present value estimate.

5-year cash flow estimate

	2018	2019	2020	2021	2022
Levered FCF (CHF, Millions)	CHF742.23	CHF832.70	CHF909.74	CHF1.03k	CHF1.05k
Source	Analyst x12	Analyst x14	Analyst x10	Analyst x1	Est @ 2.37%
Present Value Discounted @ 8.74%	CHF682.56	CHF704.19	CHF707.49	CHF735.19	CHF692.11

Present Value of 5-year Cash Flow (PVCF)= CHF3.52b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after the five years. For a number of reasons a very conservative growth rate is used that cannot exceed that of the GDP. In this case I have used the 10-year government bond rate (3.7%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 8.7%.

Terminal Value (TV) = FCF₂₀₂₂ × (1 + g) ÷ (r – g) = CHF1.05b × (1 + 3.7%) ÷ (8.7% – 3.7%) = CHF21.69b

Present Value of Terminal Value (PVTV) = TV / (1 + r)⁵ = CHF21.69b ÷ ( 1 + 8.7%)⁵ = CHF14.27b

The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is CHF17.79b. To get the intrinsic value per share, we divide this by the total number of shares outstanding, or the equivalent number if this is a depositary receipt or ADR. This results in an intrinsic value of CHF2355.65. Relative to the current share price of CHF2563, the stock is fair value, maybe slightly overvalued at the time of writing.

SWX:SGSN Intrinsic Value Export August 20th 18

The assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 SGS 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 8.7%, which is based on a levered beta of 0.800. 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:

Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company. For SGSN, there are three pertinent aspects you should further examine:

Financial Health: Does SGSN 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 SGSN’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 SGSN? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St does a DCF calculation for every CH stock every 6 hours, so if you want to find the intrinsic value of any other stock 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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