In this article, you will get all information regarding Surgical Science Sweden AB (publ) (STO:SUS) shares could be 49% below their intrinsic value estimate
Important insights
- Surgical Science Sweden’s estimated fair value is SEK 314 based on 2-step free cash flow to equity
- Current share price of SEK 162 indicates that Surgical Science Sweden is 49% undervalued
- Analyst price target for SUS is SEK 239 which is 24% below our estimate of fair value
Today we will do a simple review of a valuation method used to estimate the attractiveness of Surgical Science Sweden AB (publ) (STO: SUS) as an investment opportunity by taking the company’s projected future cash flows and discounting them back to today’s value. This will be done using the Discounted Cash Flow (DCF) model. Before you think you won’t be able to understand it, just read on! It’s actually a lot less complicated than you might imagine.
We want to caution that there are many ways to value a company and, like DCF, each technique has advantages and disadvantages in certain scenarios. If you want to learn more about discounted cash flow, the logic behind this calculation can be read in detail in Simply Wall St analysis model.
See our latest analysis for Surgical Science Sweden
The method
We will use a two-stage DCF model, which, as the name suggests, takes into account two stages of growth. The first stage is generally a higher growth period that levels off towards the terminal value, captured in the second “steady growth period”. To begin with, we need to get estimates of the next ten years’ cash flows. Where possible, we use analyst estimates, but when these are not available, we extrapolate past free cash flow (FCF) from the most recent estimate or reported value. We assume that companies with shrinking free cash flow will slow their rate of contraction, and that companies with growing free cash flow will see their growth rate slow during this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
In general, we assume that a dollar today is worth more than a dollar in the future, so we must discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) estimate.
2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | |
Levered FCF (SEK, million) | SEK 169.6 million | SEK 239.0 million | SEK 313.2 million | SEK 495.7 million | SEK 616.3 million | SEK 721.9 million | SEK 809.5 million | SEK 879.2 million | SEK 933.3 million | SEK 974.6 million |
Source for estimation of growth rate | Analyst x3 | Analyst x3 | Analyst x1 | Analyst x1 | Calculated @ 24.32% | Calculated @ 17.15% | Calculated @ 12.13% | Calculated @ 8.61% | Calculated @ 6.15% | Calculated @ 4.43% |
Present value (SEK, million) discounted @ 5.4% | SEK 161 | SEK 215 | SEK 268 | SEK 402 | SEK 474 | SEK 527 | SEK 561 | SEK 578 | SEK 582 | SEK 577 |
(“Estimate” = FCF growth rate estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = SEK 4.3 billion
The second step is also known as Terminal Value, this is the business’s cash flow after the first step. For several reasons, a very conservative growth rate is used that cannot exceed a country’s GDP growth. In this case, we have used the 5-year average of the 10-year government bond yield (0.4%) to estimate future growth. As with the 10-year “growth period,” we discount future cash flows to present value, using a cost of equity of 5.4%.
Terminal value (TV)= FCF_{2032} × (1 + g) ÷ (r – g) = SEK975m× (1 + 0.4%) ÷ (5.4%–0.4%) = SEK20b
Present Value of Terminal Value (PVTV)= TV / (1 + r)^{10}= SEK20b÷ (1 + 5.4%)^{10}= SEK 12 billion
The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in Total Equity Value, which in this case is SEK 16 billion. To get the intrinsic value per share, we divide this by the total number of outstanding shares. Compared to the current share price of SEK 162, the company appears to be quite undervalued at a 49% discount to where the share price is currently trading. The assumptions in each calculation have a big impact on the valuation, so it’s better to think of this as a rough estimate, not exactly down to the last cent.
The 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 these inputs, I recommend redoing the calculations yourself and playing around with them. DCF also does not take into account an industry’s possible cyclicality, or a company’s future capital requirements, so it does not provide a complete picture of a company’s potential performance. Given that we view Surgical Science Sweden 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 the debt. In this calculation, we have used 5.4%, which is based on a leverage beta of 0.894. Beta is a measure of a stock’s volatility, compared to the market as a whole. We derive 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 Surgical Science Sweden
- Profit growth over the past year outpaced the industry.
- No major weaknesses identified for SUS.
- The annual result is expected to grow faster than the Swedish market.
- Trades below our estimate of fair value by more than 20%.
- Revenue is expected to grow slower than 20% per year.
Move on:
While important, the DCF calculation is only one of many factors you need to assess for a business. DCF models are not the be-all and end-all of investment valuation. Ideally, you would apply different cases and assumptions and see how they would affect the company’s valuation. For example, changes in the company’s cost of equity capital or the risk-free rate can significantly affect the valuation. What is the reason why the share price is below the intrinsic value? For Surgical Science Sweden, we have compiled three additional factors you should assess:
- Financial health: Does SUS have a healthy balance sheet? Take a look at ours free balance sheet analysis with six simple checks on key factors such as leverage and risk.
- Future results: How does SUS’s growth rate compare to its peers and the broader market? Dig deeper into the analyst consensus numbers for the coming years by interacting with our free charts for analyst growth expectations.
- Other high-quality options: Do you like a good all-round player? Explore our interactive list of high-quality stocks to get an idea of what else is out there you might be missing!
PS. The Simply Wall St app performs a discounted cash flow valuation for each stock on OM every day. If you want to find the calculation for other shares only Search here.
Valuation is complex, but we help make it simple.
Find out about Surgical Science Sweden is potentially over- or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and caveats, dividends, insider trading and financial health.
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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 by 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 shares and does not take into account your goals or your financial situation. We strive to provide you with long-term focused analysis driven by fundamental data. Note that our analysis may not take into account recent price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
Surgical Science Sweden AB (publ) (STO:SUS) shares could be 49% below their intrinsic value estimate
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