Calculating The Fair Value Of Alliance Healthcare Group Limited (Catalist:MIJ)
editorial-team@simplywallst.com (Simply Wall St)
6 min read
Key Insights
Alliance Healthcare Group's estimated fair value is S$0.12 based on 2 Stage Free Cash Flow to Equity
With S$0.14 share price, Alliance Healthcare Group appears to be trading close to its estimated fair value
The average discount for Alliance Healthcare Group's competitorsis currently 25%
In this article we are going to estimate the intrinsic value of Alliance Healthcare Group Limited (Catalist:MIJ) by taking the expected future cash flows and discounting them to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. It may sound complicated, but actually it is quite simple!
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
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 ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last 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.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) estimate
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF (SGD, Millions)
S$1.66m
S$1.45m
S$1.33m
S$1.27m
S$1.23m
S$1.21m
S$1.21m
S$1.21m
S$1.22m
S$1.24m
Growth Rate Estimate Source
Est @ -18.71%
Est @ -12.47%
Est @ -8.10%
Est @ -5.04%
Est @ -2.90%
Est @ -1.40%
Est @ -0.35%
Est @ 0.39%
Est @ 0.90%
Est @ 1.26%
Present Value (SGD, Millions) Discounted @ 6.3%
S$1.6
S$1.3
S$1.1
S$1.0
S$0.9
S$0.8
S$0.8
S$0.7
S$0.7
S$0.7
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = S$9.6m
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 2.1%. We discount the terminal cash flows to today's value at a cost of equity of 6.3%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= S$30m÷ ( 1 + 6.3%)10= S$16m
The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is S$26m. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of S$0.1, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.
Catalist:MIJ Discounted Cash Flow July 24th 2024
Important Assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own assumptions. 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 Alliance Healthcare Group 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 6.3%, which is based on a levered beta of 0.922. 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 Alliance Healthcare Group
Strength
Debt is not viewed as a risk.
Weakness
Earnings declined over the past year.
Dividend is low compared to the top 25% of dividend payers in the Healthcare market.
Current share price is above our estimate of fair value.
Opportunity
MIJ's financial characteristics indicate limited near-term opportunities for shareholders.
Lack of analyst coverage makes it difficult to determine MIJ's earnings prospects.
Threat
Paying a dividend but company has no free cash flows.
Moving On:
Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. It's not possible to obtain a foolproof valuation with a DCF model. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. 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 Alliance Healthcare Group, we've put together three essential aspects you should further research:
Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the CATALIST every day. If you want to find the calculation for other stocks just search here.
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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.
