I am going to run you through how I calculated the intrinsic value of Genmab A/S (

CPH:GEN

) by taking the foreast future cash flows of the company and discounting them back to today’s value. I will use the Discounted Cash Flows (DCF) model. It may sound complicated,woochie by cinema secrets but actually it is quite simple! If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the

Simply Wall St analysis model

. If you are reading this and its not January 2019 then I highly recommend you check out the latest calculation for Genmab by following the link below.

Check out our latest analysis for Genmab

Is GEN 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 the sum of these cash flows to arrive at a present value estimate.

5-year cash flow estimate

2019

2020

2021

2022

2023

Levered FCF (DKK, Millions)

DKK1.65k

DKK2.19k

DKK2.86k

DKK3.61k

DKK4.45k

Source

Analyst x6

Analyst x4

Analyst x2

Analyst x2

Analyst x2

Present Value Discounted @ 8.11%

DKK1.52k

DKK1.87k

DKK2.26k

DKK2.64k

DKK3.01k

Present Value of 5-year Cash Flow (PVCF)

= ø11b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after the five years. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 0.6%. We discount this to today’s value at a cost of equity of 8.1%.

Terminal Value (TV)

= FCF

2023

× (1 + g) ÷ (r – g) = ø4.4b × (1 + 0.6%) ÷ (8.1% – 0.6%) = ø59b

Present Value of Terminal Value (PVTV)

= TV / (1 + r)

5

= ø59b ÷ ( 1 + 8.1%)

5

= ø40b

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is ø51b. 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 DKK835.67

. Relative to the current share price of DKK1067.5, the stock is fair value, maybe slightly overvalued and not available at a discount at this time.

CPSE:GEN Intrinsic Value Export January 2nd 19

Important assumptions

I’d like to 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 my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Genmab 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 8.1%, 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.

Story continues

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 GEN, I’ve put together three fundamental factors you should look at:

Financial Health

: Does GEN 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 GEN’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 GEN? 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 DK 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

[email protected]

.

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