Rovio Entertainment Oyj (HEL:ROVIO) Intrinsic Calculations Show It’s 21% Undervalued

In this article, we will estimate the intrinsic value of Rovio Entertainment Oyj (HEL: Rovio) by taking expected future cash flows and discounting them to today’s value. Our analysis will use a discounted cash flow (DCF) model. Don’t be intimidated by the jargon, the math behind it is actually pretty simple.

We generally think that the value of a company is the present value of all the cash it will generate in the future. However, DCF is just one of many valuation metrics, and it’s not without its flaws. For those keen on stock analysis, Simple Wall Street analysis model is here Might be something you are interested in.

Our analysis shows that ROVIO may be underrated!

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We are using a two-stage growth model, which means we consider two stages of a company’s growth. In the initial stage, a company may have a higher growth rate, while the second stage is generally considered to have a steady growth rate. First, we must estimate the cash flow for the next ten years. Where possible, we use analyst estimates, but when these estimates are not available, we extrapolate prior free cash flow (FCF) from last estimated or reported values. We assume that companies with shrinking free cash flow will slow their rate of contraction, while companies with growing free cash flow will see their growth rate slow during this period. We do this to reflect that growth in early years tends to slow more than in later years.

In general, we assume that a dollar today is worth more than a dollar in the future, so we discount the value of these future cash flows to an estimate in today’s dollars:

10-Year Free Cash Flow (FCF) Forecast

(“Est” = Simple Wall Street estimated FCF growth rate)
10-Year Present Value of Cash Flows (PVCF) = 267 million euros

We now need to calculate the future value, which accounts for all future cash flows after this decade. For a number of reasons, very conservative growth rates are used, which cannot exceed a country’s GDP growth rate. In this case, we used the 5-year average of 10-year government bond yields (0.3%) to estimate future growth. As with the 10-year “growth” period, we discount future cash flows to current value using a cost of equity of 5.6%.

Final Value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = EUR 32 million × (1 + 0.3%) ÷ (5.6% – 0.3%) = EUR 603 million

Present value of future value (PVTV)= TV / (1 + r)¹⁰= EUR 603 million ÷ ( 1 + 5.6%)¹⁰= 349 million euros

The total value or equity value is the sum of the present value of future cash flows, in this case EUR 616 million. The final step is to divide the equity value by the number of shares outstanding. The company appears to be undervalued by 21% compared to its current share price of 6.3 euros, which currently trades at a 21% discount. But keep in mind that this is just an approximation, like any complex formula – garbage in, garbage out.

Assumption

We would point out that the most important input to discounted cash flow is the discount rate, and of course actual cash flow. You don’t have to agree to these inputs, I suggest you redo the calculations yourself and use them. DCF also does not take into account the cyclical nature of an industry, or a company’s future capital needs, so it does not fully reflect a company’s potential performance. Given that we consider Rovio Entertainment Oyj as a potential shareholder, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC), which is a percentage of debt. In this calculation, we used 5.6%, which is based on a leveraged beta of 0.955. Beta is a measure of a stock’s volatility compared to the overall market. We derive our betas from the industry average betas of globally comparable companies, and enforce a limit between 0.8 and 2.0, which is a reasonable range for a stable business.

SWOT Analysis of Rovio Entertainment Oyj

Next step:

While important, DCF calculations shouldn’t be the only metric you look at when researching a company. A foolproof valuation cannot be obtained using the DCF model. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they lead to companies being undervalued or overvalued. For example, changes in a company’s cost of equity or risk-free interest rates can have a significant impact on valuation. Why is intrinsic value higher than the current share price? For Rovio Entertainment Oyj, we compiled three other elements you should check out:

1. risk: We think you should evaluate 1 Warning Sign for Rovio Entertainment Oyj Before investing in a company, we have flagged it.
2. future earnings: How does ROVIO’s growth rate compare to its peers and the broader market?Dig deeper into analyst consensus numbers for the next few years by engaging with us Free Analyst Growth Expectations Chart.
3. Other high-quality alternatives: Do you like a good generalist?explore Our interactive list of quality stocks To find out what else you might be missing!

PS. The Simply Wall St app provides a daily discounted cash flow valuation for every stock on HLSE.If you just want to find calculations for other stocks search here.

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This article by Simply Wall St is general in nature. We provide commentary based solely on historical data and analyst forecasts using an unbiased methodology and our articles are not intended to provide financial advice. It does not constitute advice to buy or sell any stock and does not take into account your objectives or your financial situation. Our goal is to bring you long-term focused analytics driven by fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Wall Street has no positions in any of the stocks mentioned.