Estimating The Intrinsic Value Of Pharmaniaga Berhad (KLSE:PHARMA)

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Simply Wall St

Wed, Sep 6, 2023, 6:25 PM 4 min read

Key Insights

Using the Dividend Discount Model, Pharmaniaga Berhad fair value estimate is RM0.40
Pharmaniaga Berhad's RM0.47 share price indicates it is trading at similar levels as its fair value estimate
Our fair value estimate is 16% higher than Pharmaniaga Berhad's analyst price target of RM0.34

In this article we are going to estimate the intrinsic value of Pharmaniaga Berhad (KLSE:PHARMA) by estimating the company's future cash flows and discounting them to their present value. Our analysis will employ the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.

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. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

View our latest analysis for Pharmaniaga Berhad

The Calculation

We have to calculate the value of Pharmaniaga Berhad slightly differently to other stocks because it is a healthcare company. In this approach dividends per share (DPS) are used, as free cash flow is difficult to estimate and often not reported by analysts. This often underestimates the value of a stock, but it can still be good as a comparison to competitors. The 'Gordon Growth Model' is used, which simply assumes that dividend payments will continue to increase at a sustainable growth rate forever. The dividend is expected to grow at an annual growth rate equal to the 5-year average of the 10-year government bond yield of 3.6%. We then discount this figure to today's value at a cost of equity of 9.0%. Relative to the current share price of RM0.5, the company appears around fair value at the time of writing. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

Value Per Share = Expected Dividend Per Share / (Discount Rate - Perpetual Growth Rate)

= RM0.02 / (9.0% – 3.6%)

= RM0.4

dcf — KLSE:PHARMA Discounted Cash Flow September 7th 2023

The 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 Pharmaniaga Berhad 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 9.0%, which is based on a levered beta of 0.800. 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 Pharmaniaga Berhad

Strength

No major strengths identified for PHARMA.

Weakness

Shareholders have been diluted in the past year.

Opportunity

Expected to breakeven next year.

Has sufficient cash runway for more than 3 years based on current free cash flows.

Good value based on P/S ratio compared to estimated Fair P/S ratio.

Threat

Debt is not well covered by operating cash flow.

Total liabilities exceed total assets, which raises the risk of financial distress.

Moving On:

Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize for 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. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Pharmaniaga Berhad, we've put together three essential factors you should consider:

Risks: For example, we've discovered 4 warning signs for Pharmaniaga Berhad (2 are potentially serious!) that you should be aware of before investing here.
Future Earnings: How does PHARMA'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 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. Simply Wall St updates its DCF calculation for every Malaysian stock every day, so if you want to find the intrinsic value of any other stock 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.