• Tue. Nov 22nd, 2022

Estimation of the intrinsic value of the company of the medical services group of Dr. Sulaiman Al Habib (TADAWUL: 4013)

ByMadeleine J. Pierce

Aug 24, 2022

In this article, we will estimate the intrinsic value of Dr. Sulaiman Al Habib Medical Services Group (TADAWUL:4013) company by projecting its future cash flows and then discounting them to the present value. One way to do this is to use the discounted cash flow (DCF) model. Before you think you can’t figure it out, just read on! It’s actually a lot less complex than you might imagine.

Remember though that there are many ways to estimate the value of a business and a DCF is just one method. Anyone interested in learning a little more about intrinsic value should read the Simply Wall St.

Check out our latest analysis for Dr. Sulaiman Al Habib Medical Services Group

Calculate numbers

We use what is called a 2-step model, which simply means that we have two different periods of company cash flow growth rates. Generally, the first stage is a higher growth phase and the second stage is a lower growth phase. To begin with, we need to obtain cash flow estimates for the next ten years. Wherever possible, we use analysts’ estimates, but where these are not available, we extrapolate the previous free cash flow (FCF) from the latest estimate or reported value. We assume that companies with decreasing free cash flow will slow their rate of contraction and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow more in early years than in later years.

A DCF is based on the idea that a dollar in the future is worth less than a dollar today, so 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

2023 2024 2025 2026 2027 2028 2029 2030 2031 2032
Leveraged FCF (SAR, Millions) ر.س126.5m ر.س1.23b ر.س1.98b ر.س2.66b ر.س3.24b ر.س3.82b ر.س4.40b ر.س4.98b ر.س5.57b ر.س6.19b
Growth rate estimate Source Analyst x4 Analyst x4 Analyst x4 Analyst x2 East @ 21.69% Is at 17.84% Is at 15.15% Is at 13.27% Is 11.95% Is at 11.03%
Present value (SAR, millions) discounted at 13% ر.س112 ر.س963 ر.س1.4k ر.س1.6k ر.س1.8k ر.س1.8k ر.س1.9k ر.س1.9k ر.س1.9k ر.س1.8k

(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = ر.س15b

The second stage is also known as the terminal value, it is the cash flow of the business after the first stage. The Gordon Growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average 10-year government bond yield of 8.9%. We discount terminal cash flows to present value at a cost of equity of 13%.

Terminal value (TV)= FCF2032 × (1 + g) ÷ (r – g) = ر.س6.2b× (1 + 8.9%) ÷ (13%– 8.9%) = ر.س169b

Present value of terminal value (PVTV)= TV / (1 + r)ten= ر.س169b÷ ( 1 + 13%)ten= ر.س50b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ر.س65b. To get the intrinsic value per share, we divide it by the total number of shares outstanding. Compared to the current share price of ر.س210, the company appears around fair value at the time of writing. Remember though that this is only a rough estimate, and like any complex formula – trash in, trash out.

SASE: 4013 Discounted cash flow August 24, 2022

Important assumptions

We emphasize that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you disagree with these results, try the math yourself and play around with the assumptions. The DCF also does not take into account the possible cyclicality of an industry, nor the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we consider Dr. Sulaiman Al Habib Medical Services Group 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 into account debt. In this calculation, we used 13%, which is based on a leveraged beta of 0.809. Beta is a measure of a stock’s volatility relative to the market as a whole. We derive our beta from the average industry beta of broadly comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.

Let’s move on :

Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won’t be the only piece of analysis you look at for a company. It is not possible to obtain an infallible valuation with a DCF model. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under/overvalued?” For example, if the terminal value growth rate is adjusted slightly, it can significantly change the overall result. For Dr. Sulaiman Al Habib Medical Services Group, we have compiled three additional things you should consider in more detail:

  1. Financial health: Does 4013 have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors such as leverage and risk.
  2. Future earnings: How does 4013’s growth rate compare to its peers and the market in general? Dive deeper into the analyst consensus figure for the coming years by interacting with our free analyst growth forecast chart.
  3. Other high-quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality actions to get an idea of ​​what you might be missing!

PS. The Simply Wall St app performs a discounted cash flow valuation for every stock on the SASE every day. If you want to find the calculation for other stocks, search here.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

Valuation is complex, but we help make it simple.

Find out if Dr Sulaiman Al Habib Medical Services Group is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.

See the free analysis