A Look At The Fair Value Of Andlauer Healthcare Group Inc. (TSE:AND)

Key Insights

• Andlauer Healthcare Group's estimated fair value is CA$56.1 based on 2 Stage Free Cash Flow to Equity
• Current share price of CA$47.1 suggests Andlauer Healthcare Group is trading close to its fair value
• Analyst price target for AND is CA$56.40 which is 0.6% above our fair value estimate

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Andlauer Healthcare Group Inc. (TSE:AND) 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. Believe it or not, it's not too difficult to follow, as you'll see from our example!

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. 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 Andlauer Healthcare Group

Is Andlauer Healthcare Group Fairly Valued?

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. 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.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) forecast

	2023	2024	2025	2026	2027	2028	2029	2030	2031	2032
Levered FCF (CA$, Millions)	CA$108.4m	CA$111.4m	CA$111.5m	CA$112.2m	CA$113.3m	CA$114.6m	CA$116.1m	CA$117.8m	CA$119.5m	CA$121.4m
Growth Rate Estimate Source	Analyst x4	Analyst x4	Est @ 0.15%	Est @ 0.61%	Est @ 0.93%	Est @ 1.16%	Est @ 1.32%	Est @ 1.43%	Est @ 1.51%	Est @ 1.56%
Present Value (CA$, Millions) Discounted @ 6.2%	CA$102	CA$98.8	CA$93.2	CA$88.3	CA$84.0	CA$80.0	CA$76.4	CA$73.0	CA$69.8	CA$66.7

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CA$832m

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 (1.7%) 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 6.2%.

Terminal Value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = CA$121m× (1 + 1.7%) ÷ (6.2%– 1.7%) = CA$2.8b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CA$2.8b÷ ( 1 + 6.2%)¹⁰= CA$1.5b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is CA$2.3b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of CA$47.1, the company appears about fair value at a 16% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

Important Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the 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 Andlauer Healthcare 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 6.2%, which is based on a levered beta of 0.804. 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 Andlauer Healthcare Group

Moving On:

Valuation is only one side of the coin in terms of building your investment thesis, and 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. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Andlauer Healthcare Group, there are three relevant factors you should consider:

1. Risks: Be aware that Andlauer Healthcare Group is showing 2 warning signs in our investment analysis , you should know about...
2. Future Earnings: How does AND'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. Simply Wall St updates its DCF calculation for every Canadian stock every day, so if you want to find the intrinsic value of any other stock just search here.

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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.