Stock Analysis

Calculating The Fair Value Of Healthia Limited (ASX:HLA)

ASX:HLA
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Key Insights

  • Healthia's estimated fair value is AU$1.4 based on 2 Stage Free Cash Flow to Equity
  • Current share price of AU$1.5 suggests Healthia is trading close to its fair value
  • Healthia's peers are currently trading at a discount of 8.5% on average

In this article we are going to estimate the intrinsic value of Healthia Limited (ASX:HLA) by taking the expected future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Believe it or not, it's not too difficult to follow, as you'll see from our example!

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

See our latest analysis for Healthia

Step By Step Through 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. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last 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

2023 2024 2025 2026 2027 2028 2029 2030 2031 2032
Levered FCF (A$, Millions) AU$12.8m AU$12.5m AU$12.4m AU$12.4m AU$12.4m AU$12.6m AU$12.7m AU$12.9m AU$13.1m AU$13.3m
Growth Rate Estimate Source Est @ -4.02% Est @ -2.26% Est @ -1.02% Est @ -0.15% Est @ 0.45% Est @ 0.88% Est @ 1.18% Est @ 1.38% Est @ 1.53% Est @ 1.63%
Present Value (A$, Millions) Discounted @ 7.8% AU$11.9 AU$10.8 AU$9.9 AU$9.2 AU$8.5 AU$8.0 AU$7.5 AU$7.1 AU$6.6 AU$6.3

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = AU$86m

The second stage is also known as Terminal Value, this is the business's cash flow after 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 (1.9%) 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 7.8%.

Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = AU$13m× (1 + 1.9%) ÷ (7.8%– 1.9%) = AU$228m

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= AU$228m÷ ( 1 + 7.8%)10= AU$107m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is AU$193m. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of AU$1.5, the company appears around fair value at the time of writing. 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.

dcf
ASX:HLA Discounted Cash Flow January 30th 2023

Important Assumptions

We would point out that 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 Healthia 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 7.8%, which is based on a levered beta of 0.990. 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 Healthia

Strength
  • Debt is well covered by cash flow.
Weakness
  • Interest payments on debt are not well covered.
  • Current share price is above our estimate of fair value.
  • Shareholders have been diluted in the past year.
Opportunity
  • Has sufficient cash runway for more than 3 years based on current free cash flows.
  • Significant insider buying over the past 3 months.
  • Lack of analyst coverage makes it difficult to determine HLA's earnings prospects.
Threat
  • No apparent threats visible for HLA.

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. DCF models are not the be-all and end-all of investment valuation. 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 instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Healthia, there are three relevant elements you should further research:

  1. Risks: We feel that you should assess the 2 warning signs for Healthia (1 is a bit concerning!) we've flagged before making an investment in the company.
  2. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for HLA's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
  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 ASX every day. If you want to find the calculation for other stocks just search here.

Valuation is complex, but we're helping make it simple.

Find out whether Healthia is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.