Calculating the intrinsic value of ISEC Healthcare Ltd. (Catalyst: 40T)

Key findings

• The forecast fair value for ISEC Healthcare is S$0.40 based on the 2-step free cash flow to equity

• ISEC Healthcare’s share price of S$0.39 suggests that the price is at a similar level to the estimated fair value.

• ISEC Healthcare’s competitors appear to be trading at a larger discount to fair value, based on the industry average of 27%.

How far is ISEC Healthcare Ltd. (Catalyst:40T) from its intrinsic value? Using the most recent financial data, we will check if the stock is fairly valued by taking the company’s projected future cash flows and discounting them to today’s value. Our analysis will use the Discounted Cash Flow (DCF) model. Believe it or not, it’s not too difficult to follow, as you’ll see from our example!

However, keep in mind that there are many ways to estimate the value of a company, and a DCF is just one of them. If you want to learn more about intrinsic value, you should check out Simply Wall St’s analysis model.

Check out our latest analysis for ISEC Healthcare

The calculation

We use the 2-stage growth model, which simply means we consider two stages of company growth. In the early stage, the company may have a higher growth rate, and in the second stage, a stable growth rate is usually assumed. First, we need to get estimates of the next ten years of cash flows. Since we don’t have analyst estimates of free cash flow available, we extrapolated the previous free cash flow (FCF) from the company’s last reported value. We assume that companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will slow their growth rate over this period. We do this to take into account that growth tends to slow down more in the early years than in later years.

A DCF is all about the idea that a dollar in the future is worth less than a dollar today. Therefore, we need to discount the sum of these future cash flows to arrive at an estimate of present value:

10-year free cash flow (FCF) forecast

(“Est” = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = S$73 million

The story goes on

We now need to calculate the terminal value that takes into account all future cash flows after this ten-year period. The Gordon growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average of the 10-year Treasury yield of 2.1%. We discount the terminal cash flows to today’s value at a cost of equity of 5.8%.

Final value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = S$9.9 million × (1 + 2.1%) ÷ (5.8% – 2.1%) = S$275 million

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= S$275 million ÷ ( 1 + 5.8 %)¹⁰= S$157 million

The total value or equity value is then the sum of the present value of future cash flows, which in this case is S$230 million. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of S$0.4, the company appears roughly fairly valued at a 3.6% discount to the current share price. However, keep in mind that this is only an approximate valuation and as with any complex formula, where there’s garbage in, there’s garbage out.

Important assumptions

The above calculation heavily depends on two assumptions. The first is the discount rate and the other is the cash flows. If you disagree with these results, try the calculation yourself and play with the assumptions. DCF also does not take into account the possible cyclicality of an industry or a company’s future capital needs and therefore does not provide a complete picture of a company’s potential performance. Since we consider ISEC Healthcare 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 takes debt into account. In this calculation, we have used 5.8% which is based on a leveraged beta of 0.800. Beta is a measure of a stock’s volatility relative to the overall market. We get our beta from the industry average beta of global peers with an imposed limit of between 0.8 and 2.0 which is a reasonable range for a stable company.

SWOT Analysis for ISEC Healthcare

Strength

weakness

Opportunity

Danger

Next Steps:

Although the valuation of a company is important, ideally it should not be the only analysis you look at for a company. DCF models are not the be-all and end-all of investment valuation. Preferably, you should apply different cases and assumptions and see how they affect the valuation of the company. If a company grows differently or its cost of equity or risk-free rate changes significantly, the result may look very different. For ISEC Healthcare, we have compiled three relevant factors that you should examine in more detail:

1. Risks: A typical example: We discovered 2 warning signs for ISEC Healthcare You should be aware of these, and one of them is worrying.

2. Other high-quality alternatives: Like a good all-rounder? Explore our interactive list of high-quality stocks to get a sense of what else you might be missing out on!

3. More top analyst tips: Want to know what the analysts think? Take a look at our interactive list of analyst recommended stocks and find out which stocks they think could have attractive future prospects!

PS. Simply Wall St updates its DCF calculation for each Singapore stock daily, so if you want to find out the intrinsic value of any other stock, just search here.

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This Simply Wall St article is of a general nature. We comment based solely on historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.

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