Investors Are Undervaluing Mayne Pharma Group Limited (ASX:MYX) By 38.58%

Chris Amalia

Updated Sun, Sep 23, 2018, 6:19 PM

Today I will be providing a simple run through of a valuation method used to estimate the attractiveness of Mayne Pharma Group Limited (ASX:MYX) as an investment opportunity by taking the expected future cash flows and discounting them to their present 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. If you are reading this and its not September 2018 then I highly recommend you check out the latest calculation for Mayne Pharma Group by following the link below.

View our latest analysis for Mayne Pharma Group

Is MYX fairly valued?

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. In the first stage we need to estimate the cash flows to the business over the next five years. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount the sum of these cash flows to arrive at a present value estimate.

5-year cash flow forecast

	2019	2020	2021	2022	2023
Levered FCF (A$, Millions)	A$77.40	A$87.35	A$164.70	A$192.70	A$223.53
Source	Analyst x1	Analyst x2	Analyst x1	Est @ 17%, capped from 37.83%	Est @ 16%, capped from 37.83%
Present Value Discounted @ 8.57%	A$71.29	A$74.10	A$128.69	A$138.68	A$148.16

Present Value of 5-year Cash Flow (PVCF)= AU$560.9m

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 an annual growth rate equal to the 10-year government bond rate of 2.8%. We discount this to today’s value at a cost of equity of 8.6%.

Terminal Value (TV) = FCF₂₀₂₂ × (1 + g) ÷ (r – g) = AU$223.5m × (1 + 2.8%) ÷ (8.6% – 2.8%) = AU$3.96b

Present Value of Terminal Value (PVTV) = TV / (1 + r)⁵ = AU$3.96b ÷ ( 1 + 8.6%)⁵ = AU$2.63b

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 AU$3.19b. 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 A$2.03. Compared to the current share price of A$1.25, the stock is quite good value at a 38.6% discount to what it is available for right now.

ASX:MYX Intrinsic Value Export September 24th 18

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 my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Mayne Pharma Group 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 8.6%, which is based on a levered beta of 0.802. 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:

Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For MYX, there are three fundamental factors you should further examine:

Financial Health: Does MYX 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.
Future Earnings: How does MYX’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: Are there other high quality stocks you could be holding instead of MYX? 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 AU stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.

To help readers see past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

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