A Look At The Intrinsic Value Of Advanced Medical Solutions Group plc (LON:AMS)




  • In Business
  • 2020-10-18 07:01:01Z
  • By Simply Wall St.
A Look At The Intrinsic Value Of Advanced Medical Solutions Group plc (LON:AMS)
A Look At The Intrinsic Value Of Advanced Medical Solutions Group plc (LON:AMS)  

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Advanced Medical Solutions Group plc (LON:AMS) as an investment opportunity by taking the expected future cash flows and discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

See our latest analysis for Advanced Medical Solutions Group

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. In the first stage we need to estimate the cash flows to the business over the next ten years. 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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) forecast

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Levered FCF (£, Millions)

UK£22.5m

UK£23.8m

UK£24.7m

UK£25.5m

UK£26.1m

UK£26.7m

UK£27.2m

UK£27.7m

UK£28.1m

UK£28.5m

Growth Rate Estimate Source

Analyst x2

Analyst x2

Est @ 3.99%

Est @ 3.16%

Est @ 2.58%

Est @ 2.17%

Est @ 1.89%

Est @ 1.69%

Est @ 1.55%

Est @ 1.45%

Present Value (£, Millions) Discounted @ 7.4%

UK£20.9

UK£20.6

UK£20.0

UK£19.2

UK£18.3

UK£17.4

UK£16.5

UK£15.7

UK£14.8

UK£14.0

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = UK£177m

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. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 1.2%. We discount the terminal cash flows to today's value at a cost of equity of 7.4%.

Terminal Value (TV)= FCF2030 × (1 + g) ÷ (r - g) = UK£29m× (1 + 1.2%) ÷ (7.4%- 1.2%) = UK£469m

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= UK£469m÷ ( 1 + 7.4%)10= UK£231m

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is UK£408m. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of UK£2.2, the company appears around fair value at the time of writing. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

Important assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own assumptions. 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 Advanced Medical Solutions 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 accounts for debt. In this calculation we've used 7.4%, which is based on a levered beta of 0.888. 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.

Looking Ahead:

Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for a company. It's not possible to obtain a foolproof valuation with a DCF model. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For Advanced Medical Solutions Group, we've compiled three pertinent elements you should further examine:

  1. Financial Health: Does AMS 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.

  2. Future Earnings: How does AMS'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.

  3. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

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

This article by Simply Wall St is general in nature. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.

COMMENTS

More Related News

Is There An Opportunity With Portmeirion Group PLC
Is There An Opportunity With Portmeirion Group PLC's (LON:PMP) 22% Undervaluation?

Does the October share price for Portmeirion Group PLC (LON:PMP) reflect what it's really worth? Today, we will...

Consti Plc Interim Report for January - September 2020
Consti Plc Interim Report for January - September 2020

CONSTI PLC INTERIM REPORT 28 OCTOBER 2020, at 8.30 a.m.Consti Plc Interim Report for January - September 2020                                       PROFITABILITY AND CASH FLOW IMPROVED7-9/2020 highlights (comparison figures in parenthesis 7-9/2019): ·Net sales EUR 68.2 (81.8) million; change -16.7% ·EBITDA EUR 3.2 (3.0) million and EBITDA margin 4.8% (3.6%) ·Operating profit (EBIT) EUR 2.5 (2.1) million and EBIT margin 3.6% (2.6%) ·Order backlog EUR 189.4 (206.4) million; change -8.2 % ·Free cash flow EUR 4.6 (-0.4) million ·Earnings per share EUR 0.21 (0.17)1-9/2020 highlights (comparison figures in parenthesis 1-9/2019): ·Net sales EUR 196.5 (236.5) million; change -16.9%...

Are Investors Undervaluing Tandem Diabetes Care, Inc. (NASDAQ:TNDM) By 27%?
Are Investors Undervaluing Tandem Diabetes Care, Inc. (NASDAQ:TNDM) By 27%?

Today we will run through one way of estimating the intrinsic value of Tandem Diabetes Care, Inc. (NASDAQ:TNDM) by...

Paradigm Biopharmaceuticals Limited
Paradigm Biopharmaceuticals Limited's (ASX:PAR) Intrinsic Value Is Potentially 45% Above Its Share Price

In this article we are going to estimate the intrinsic value of Paradigm Biopharmaceuticals Limited (ASX:PAR) by...

Millendo Therapeutics (NASDAQ:MLND) Will Have To Spend Its Cash Wisely
Millendo Therapeutics (NASDAQ:MLND) Will Have To Spend Its Cash Wisely

Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and...

Leave a Comment

Your email address will not be published. Required fields are marked with *

Cancel reply

Comments

Top News: Business