Mediclinic International plc's (LON:MDC) Intrinsic Value Is Potentially 54% Above Its Share Price
How far is Mediclinic International plc (LON: MDC) from its intrinsic value? Using the latest financial data, we'll test if the stock is fair priced by converting the company's projected future cash flows back to today's value. We use the Discounted Cash Flow (DCF) model for this purpose. Models like this may seem beyond the understanding of a layperson, but are fairly easy to follow.
We generally believe that a company's value is the present value of all of the money it will generate in the future. However, a DCF is just one valuation metric among many and not without its flaws. If you want to know more about discounted cash flow, you can read in detail the reasons behind this calculation in the Simply Wall St analytical model.
Check out our latest analysis for Mediclinic International
What is the estimated rating?
We use what is known as a 2-step model, which simply means that we have two different growth rates for the company's cash flows. Generally, the first stage is higher growth and the second stage is lower growth phase. First, we need to estimate the cash flows for the next ten years. We use analyst estimates whenever possible. However, if these are not available, we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume that companies with shrinking free cash flow will slow their rate of contraction and that companies with increasing free cash flow will slow their growth rate over this period. We do this to reflect that growth tends to slow down more in the early years than in later years.
In general, we assume that a dollar today is more valuable than a dollar in the future. Hence, we need to discount the sum of these future cash flows to get a present value estimate:
10-year free cash flow forecast (FCF)
Leverage FCF (£, million)
UK £ 228.0m
UK £ 292.0m
UK £ 339.4m
UK £ 379.2m
UK £ 411.7m
UK £ 437.9m
UK £ 459.0m
UK £ 476.2m
UK £ 490.4m
UK £ 502.5m
Growth rate estimate source
Est @ 16.23%
Est @ 11.73%
Est @ 8.57%
Est @ 6.37%
Est @ 4.82%
Est @ 3.74%
Est @ 2.99%
Est @ 2.46%
Present value (£, million) discount of 13%
UK £ 202
UK £ 228
UK £ 235
UK £ 232
UK £ 223
UK £ 210
UK £ 194
UK £ 178
UK £ 162
UK £ 147
("Est" = FCF growth rate, estimated by Simply Wall St)
Present Value of 10 Year Cash Flow (PVCF) = UK £ 2.0bn
After calculating the present value of future cash flows in the first 10 years, we need to calculate the terminal value that takes into account all future cash flows beyond the first stage. A very conservative growth rate is used that cannot exceed that of any country's GDP growth for a number of reasons. In this case, we used the 5-year average 10-year government bond yield (1.2%) to estimate future growth. Similar to the 10-year growth period, we discount future cash flows to today's value using a cost of equity rate of 13%.
End value (TV) = FCF2030 × (1 + g) ÷ (r - g) = UK £ 502m × (1 + 1.2%) ÷ (13% - 1.2%) = UK £ 4.3b
Present Value of Terminal Value (PVTV) = TV / (1 + r) 10 = UK £ 4.3bn ÷ (1 + 13%) 10 = UK £ 1.3bn
The total value or equity value is then the sum of the present value of the future cash flows, which in this case is £ 3.3 billion. In the last step, we divide the equity value by the number of shares issued. Compared to the current UK share price of £ 2.9, the company appears to be quite undervalued at a 35% discount to the current share price. Remember, however, that this is only a rough estimate, and like any complex formula - garbage in, garbage out.
The most important inputs for a discounted cash flow are now the discount rate and of course the actual cash flows. Part of the investment is making your own assessment of a company's future performance. So try it yourself and check your own assumptions. The DCF also does not take into account the possible cyclical nature of an industry or the future capital requirements of a company, so it does not give a complete picture of a company's potential performance. Given that we view Mediclinic International 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) responsible for debt. In this calculation we used 13% based on a leverage beta of 1.119. Beta is a measure of the volatility of a stock compared to the overall market. 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.
The DCF calculation is important, but it is only one of many factors that you have to evaluate for a company. DCF models are not the be-all and end-all of investment valuation. The best thing to do is to apply different cases and assumptions and see how they affect the company's valuation. If a company is growing at a different rate, or if the cost of equity or the risk-free rate changes dramatically, performance can look very different. What is the reason that the share price is below the intrinsic value? For Mediclinic International there are three relevant factors that you should evaluate:
Risks: Every company has them, and we've spotted 1 Mediclinic International Warning Sign you should know about.
Future Outcome: What is MDC's growth rate compared to its competitors and the broader market? Learn more about analyst consensus number for the years to come 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 you might be missing!
PS. The Simply Wall St app performs a discounted cash flow assessment for every share on the LSE every day. If you want to find the calculation for other stocks, just search here.
This article from Simply Wall St is of a general nature. It is not a recommendation to buy or sell shares and does not take into account your goals or your financial situation. We want to provide you with a long-term, focused analysis based on fundamental data. Note that our analysis may not take into account the latest price sensitive company announcements or quality materials. Simply Wall St has no position in the stocks mentioned.
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