Estimating The Intrinsic Value Of German High Street Properties A/S (CPH:GERHSP)
Key Insights
- German High Street Properties' estimated fair value is kr.50.21 based on 2 Stage Free Cash Flow to Equity
- With kr.59.50 share price, German High Street Properties appears to be trading close to its estimated fair value
- When compared to theindustry average discount of -70%, German High Street Properties' competitors seem to be trading at a greater premium to fair value
How far off is German High Street Properties A/S (CPH:GERHSP) 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. Believe it or not, it's not too difficult to follow, as you'll see from our example!
We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. 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.
The Method
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. In the first stage we need to estimate the cash flows to the business over the next ten years. 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.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) forecast
| 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | 2035 | |
| Levered FCF (€, Millions) | €835.5k | €1.12m | €1.39m | €1.63m | €1.84m | €2.01m | €2.16m | €2.27m | €2.37m | €2.46m |
| Growth Rate Estimate Source | Est @ 47.62% | Est @ 33.85% | Est @ 24.20% | Est @ 17.46% | Est @ 12.73% | Est @ 9.43% | Est @ 7.11% | Est @ 5.49% | Est @ 4.36% | Est @ 3.56% |
| Present Value (€, Millions) Discounted @ 9.2% | €0.8 | €0.9 | €1.1 | €1.1 | €1.2 | €1.2 | €1.2 | €1.1 | €1.1 | €1.0 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = €11m
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 (1.7%) 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 9.2%.
Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = €2.5m× (1 + 1.7%) ÷ (9.2%– 1.7%) = €33m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= €33m÷ ( 1 + 9.2%)10= €14m
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is €25m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of kr.59.5, 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.
Important Assumptions
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. 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 German High Street Properties 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 9.2%, which is based on a levered beta of 1.776. 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.
See our latest analysis for German High Street Properties
SWOT Analysis for German High Street Properties
- No major strengths identified for GERHSP.
- Interest payments on debt are not well covered.
- Current share price is above our estimate of fair value.
- Has sufficient cash runway for more than 3 years based on current free cash flows.
- Lack of analyst coverage makes it difficult to determine GERHSP's earnings prospects.
- Debt is not well covered by operating cash flow.
Next Steps:
Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For German High Street Properties, we've put together three fundamental aspects you should assess:
- Risks: For example, we've discovered 4 warning signs for German High Street Properties (3 don't sit too well with us!) that you should be aware of before investing here.
- 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!
- Other Top Analyst Picks: Interested to see what the analysts are thinking? Take a look at our interactive list of analysts' top stock picks to find out what they feel might have an attractive future outlook!
PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the CPSE every day. If you want to find the calculation for other stocks 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.