Are Investors Undervaluing WELL Health Technologies Corp. (TSE:WELL) By 40%?

Key Insights

• WELL Health Technologies' estimated fair value is CA$5.3 based on 2 Stage Free Cash Flow to Equity
• Current share price of CA$3.2 suggests WELL Health Technologies is 40% undervalued
• Analyst price target for WELL is CA$7.66 which is 45% above our fair value estimate

In this article we are going to estimate the intrinsic value of WELL Health Technologies Corp. (TSE:WELL) by projecting its future cash flows and then discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

View our latest analysis for WELL Health Technologies

The Model

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. To begin with, we have to get estimates of 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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, 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$79.4m	CA$92.5m	CA$74.9m	CA$73.8m	CA$73.5m	CA$73.6m	CA$74.1m	CA$74.8m	CA$75.6m	CA$76.6m
Growth Rate Estimate Source	Analyst x7	Analyst x2	Analyst x1	Est @ -1.42%	Est @ -0.48%	Est @ 0.17%	Est @ 0.62%	Est @ 0.94%	Est @ 1.17%	Est @ 1.32%
Present Value (CA$, Millions) Discounted @ 7.3%	CA$74.0	CA$80.4	CA$60.6	CA$55.7	CA$51.7	CA$48.2	CA$45.2	CA$42.6	CA$40.1	CA$37.9

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CA$537m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 1.7%. We discount the terminal cash flows to today's value at a cost of equity of 7.3%.

Terminal Value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = CA$77m× (1 + 1.7%) ÷ (7.3%– 1.7%) = CA$1.4b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CA$1.4b÷ ( 1 + 7.3%)¹⁰= CA$687m

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 CA$1.2b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of CA$3.2, the company appears quite undervalued at a 40% 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.

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. 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 WELL Health Technologies 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 7.3%, which is based on a levered beta of 0.933. 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 WELL Health Technologies

Moving On:

Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for a company. It's not possible to obtain a foolproof valuation with a DCF model. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" 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. What is the reason for the share price sitting below the intrinsic value? For WELL Health Technologies, we've put together three fundamental items you should look at:

1. Risks: To that end, you should be aware of the 2 warning signs we've spotted with WELL Health Technologies .
2. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for WELL'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 TSX every day. If you want to find the calculation for other stocks 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.