Key Insights

SFL's estimated fair value is US$11.10 based on 2 Stage Free Cash Flow to Equity Current share price of US$9.03 suggests SFL is potentially trading close to its fair value Analyst price target for SFL is US$11.80, which is 6.3% above our fair value estimate

In this article we are going to estimate the intrinsic value of SFL Corporation Ltd. (NYSE:SFL) by taking the expected future cash flows and discounting them to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. 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.

See our latest analysis for SFL

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. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or 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, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) forecast

2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 Levered FCF ($, Millions)  US$405.5m US$288.0m US$192.0m US$144.1m US$120.1m US$107.1m US$99.9m US$96.0m US$94.2m US$93.7m Growth Rate Estimate Source Analyst x2 Analyst x2 Analyst x1 Est @ -24.95% Est @ -16.64% Est @ -10.82% Est @ -6.75% Est @ -3.90% Est @ -1.91% Est @ -0.51% Present Value ($, Millions) Discounted @ 11%  US$364 US$232 US$139 US$93.5 US$70.0 US$56.0 US$46.9 US$40.4 US$35.6 US$31.8

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$1.1b

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.8%. We discount the terminal cash flows to today's value at a cost of equity of 11%.

Story Continues

Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = US$94m× (1 + 2.8%) ÷ (11%– 2.8%) = US$1.1b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$1.1b÷ ( 1 + 11%)10= US$377m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$1.5b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of US$9.0, the company appears about fair value at a 19% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.NYSE:SFL Discounted Cash Flow March 3rd 2025

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 SFL 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 11%, which is based on a levered beta of 2.000. 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.

SWOT Analysis for SFL

Strength

Earnings growth over the past year exceeded the industry.

Dividend is in the top 25% of dividend payers in the market.

Weakness

Interest payments on debt are not well covered.

Opportunity

Current share price is below our estimate of fair value.

Threat

Debt is not well covered by operating cash flow.

Dividends are not covered by earnings.

Annual earnings are forecast to decline for the next 3 years.

Next Steps:

Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For SFL, there are three fundamental elements you should further research:

Risks: Consider for instance, the ever-present spectre of investment risk.  We've identified 3 warning signs  with SFL , and understanding them should be part of your investment process. Future Earnings: How does SFL'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 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!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NYSE every day. If you want to find the calculation for other stocks just search here.

Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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