A Look At The Fair Value Of Koninklijke Ahold Delhaize NV (AMS:AD)

Today I will be providing a simple run through of a valuation method used to estimate the attractiveness of Koninklijke Ahold Delhaize NV (AMS:AD) as an investment opportunity by taking the foreast future cash flows of the company and discounting them back to today’s value. This is done using the Discounted Cash Flows (DCF) model. It may sound complicated, 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. Please also note that this article was written in June 2018 so be sure check out the updated calculation by following the link below. View out our latest analysis for Koninklijke Ahold Delhaize

What’s the value?

I’m using the 2-stage growth model, which simply means we take in account two stages of company’s growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have perpetual stable growth rate. To start off with we need to estimate the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. The sum of these cash flows is then discounted to today’s value.

5-year cash flow estimate

2018	2019	2020	2021	2022
Levered FCF (€, Millions)	€1.86k	€1.86k	€1.91k	€2.09k	€2.14k
Source	Analyst x14	Analyst x13	Analyst x8	Analyst x2	Analyst x2
Present Value Discounted @ 8.14%	€1.72k	€1.59k	€1.51k	€1.53k	€1.44k

Present Value of 5-year Cash Flow (PVCF)= €7.80b

The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage. 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 (0.7%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 8.1%.

Terminal Value (TV) = FCF₂₀₂₂ × (1 + g) ÷ (r – g) = €2.14b × (1 + 0.7%) ÷ (8.1% – 0.7%) = €28.95b

Present Value of Terminal Value (PVTV) = TV / (1 + r)⁵ = €28.95b ÷ ( 1 + 8.1%)⁵ = €19.57b

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 €27.37b. 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 €23.08. Compared to the current share price of €20.41, the stock is about right, perhaps slightly undervalued at a 11.60% discount to what it is available for right now.

ENXTAM:AD Intrinsic Value June 21st 18

Important assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don’t agree with my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at Koninklijke Ahold Delhaize 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.

Next Steps:

Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company.

For AD, I’ve put together three key factors you should look at:

1. Financial Health: Does AD 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.

2. Future Earnings: How does AD’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.

3. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of AD? 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 NL stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.

To help readers see pass 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.