AK Medical Holdings' estimated fair value is HK$7.47 based on 2 Stage Free Cash Flow to Equity
Current share price of HK$5.41 suggests AK Medical Holdings is potentially 28% undervalued
Our fair value estimate is 6.9% lower than AK Medical Holdings' analyst price target of CN¥8.02
Today we'll do a simple run through of a valuation method used to estimate the attractiveness of AK Medical Holdings Limited (HKG:1789) as an investment opportunity by projecting its future cash flows and then discounting them to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.
The Calculation
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 start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or 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.
Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) forecast
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
Levered FCF (CN¥, Millions)
CN¥111.5m
CN¥128.0m
CN¥251.5m
CN¥298.0m
CN¥370.0m
CN¥423.6m
CN¥469.4m
CN¥507.9m
CN¥540.3m
CN¥567.9m
Growth Rate Estimate Source
Analyst x2
Analyst x2
Analyst x2
Analyst x1
Analyst x1
Est @ 14.50%
Est @ 10.79%
Est @ 8.20%
Est @ 6.39%
Est @ 5.11%
Present Value (CN¥, Millions) Discounted @ 7.4%
CN¥104
CN¥111
CN¥203
CN¥224
CN¥259
CN¥277
CN¥285
CN¥288
CN¥285
CN¥279
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = CN¥2.3b
After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.2%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 7.4%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥11b÷ ( 1 + 7.4%)10= CN¥5.5b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is CN¥7.8b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of HK$5.4, the company appears a touch undervalued at a 28% discount to where the stock price trades currently. 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.
The Assumptions
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 AK Medical Holdings 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 7.4%, which is based on a levered beta of 0.927. 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 AK Medical Holdings
Strength
Debt is not viewed as a risk.
Balance sheet summary for 1789.
Weakness
Earnings declined over the past year.
Dividend is low compared to the top 25% of dividend payers in the Medical Equipment market.
What are analysts forecasting for 1789?
Opportunity
Annual earnings are forecast to grow faster than the Hong Kong market.
Trading below our estimate of fair value by more than 20%.
Threat
No apparent threats visible for 1789.
Moving On:
Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. What is the reason for the share price sitting below the intrinsic value? For AK Medical Holdings, there are three relevant aspects you should explore:
Risks: Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with AK Medical Holdings , and understanding this should be part of your investment process.
Future Earnings: How does 1789'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 Hong Kong stock every day, so if you want to find the intrinsic value of any other stock just search here.
Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com. 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.
关键见解
根据两阶段自由现金流向股本计算,AK Medical Holdings的估计公允价值为7.47港元
目前5.41港元的股价表明AK Medical Holdings可能被低估了28%
我们的公允价值估计比AK Medical Holdings的分析师目标股价8.02元低6.9%
今天,我们将简单介绍一种估值方法,该方法用于预测AK Medical Holdings Limited(HKG: 1789)未来的现金流,然后将其折现为今天的价值,从而估计其作为投资机会的吸引力。为此,我们将利用折扣现金流 (DCF) 模型。像这样的模型可能看起来超出外行人的理解,但它们很容易理解。
但请记住,估算公司价值的方法有很多,而差价合约只是一种方法。如果你对这种估值还有一些迫切的问题,可以看看 Simply Wall St 分析模型。
现在,贴现现金流的最重要输入是贴现率,当然还有实际现金流。你不必同意这些输入,我建议你自己重做计算然后试一试。DCF也没有考虑一个行业可能的周期性,也没有考虑公司未来的资本需求,因此它没有全面反映公司的潜在表现。鉴于我们将AK Medical Holdings视为潜在股东,因此使用权益成本作为贴现率,而不是构成债务的资本成本(或加权平均资本成本,WACC)。在此计算中,我们使用了7.4%,这是基于0.927的杠杆测试版。Beta是衡量股票与整个市场相比波动性的指标。我们的测试版来自全球可比公司的行业平均贝塔值,设定在0.8到2.0之间,这是一个稳定的业务的合理范围。
AK 医疗控股公司的 SWOT 分析
力量
债务不被视为风险。
1789 年的资产负债表摘要。
弱点
在过去的一年中,收益有所下降。
与医疗设备市场前25%的股息支付者相比,股息很低。
分析师对1789年的预测是什么?
机会
预计年收入增长速度将快于香港市场。
交易价格比我们估计的公允价值低20%以上。
威胁
1789 年没有明显的威胁。
继续前进:
虽然重要,但DCF的计算只是公司需要评估的众多因素之一。DCF模型不是完美的股票估值工具。相反,DCF模型的最佳用途是测试某些假设和理论,看看它们是否会导致公司被低估或高估。例如,公司权益成本或无风险利率的变化会对估值产生重大影响。股价低于内在价值的原因是什么?对于AK Medical Holdings来说,你应该探索三个相关方面:
风险:举例来说,投资风险的幽灵无处不在。我们已经向AK Medical Holdings发现了一个警告信号,我们知道这应该是您投资过程的一部分。