Valuation: NAXS Nordic Access Buyout Fund

Firstly thanks to @financeamir on Twitter for bringing this stock to my attention.

NAX is an interesting and unusual company that is traded on the Norden Small Cap index. It allows investors access into the Nordic buyout market via funds that are normally over subscribed and 'closed' to a broad set of investors.

Since the IPO in 2007 they have steadily increased the % of equity invested in private equity funds from 7 to 86%, with the rest being in cash. The rolling 12-months earning per share is 2.83kr with NAV (July 2013) of 40,53kr per share.

The shares price is up 22% the past 12 months but has been in a trading range since around July and currently lies at 38kr, P/E 13.4 and discount to NAV 6%.

If we want to get an idea of what a reasonable price is for this stock we need to get a sense of its value. Putting a value on the underlying assets could be a tricky business especially as we don't know all the companies held plus they are not publically traded.

A simpler way, which of course introduces caveats and assumptions, is to simplfy the company down to a dividend payer and just value those cash streams. The last dividend for this year was 0.4kr with an intention to payout 0.5kr In 2014.

That's a paltry yield of 1.31%, however the long term plan is to increase the payout to shareholders to between 50-75% of earnings (currently 17.6%).

Let's assume its earnings grow at a steady 5% every year whilst the dividends paid out increase every year from the current ratio to 70% in 6 years time. The dividends received are shown below.

YEAR  Dividend

2014      0.5

2015      0.9

2016     1.25

2017     1.64

2018     2.06

2019     2.53

In 2019 we will then value the stock as if it will increase its dividend at 5% for perpetuity as earning rise at the same rate giving a terminal value. We can then discount these future cash flows and the future value of the dividend paying stock to a present value using a discount rate of 10% (many ways of calculating this but I've gone for a nice round number).

YEAR  Present value

2014      0.46

2015      0.74

2016      0.94

2017     1.11

2018     1.28

2019     1.43. Terminal present value 18.5kr

Doing the maths we get a total value per share of 24.5sek, 35.5% below the current share price. Clearly the market values this stock differently but gives us an idea of what the dividend side of the business could be worth under this scebario.

What this type of valuation misses is the 'potential dividend' of the company as it only will pay out 50-75% of it's earnings. This means there will be cash left over which can be further invested, which in turn will increase value through additional earnings and higher dividends.

Perhaps that will be a topic for a future blog entry!