A Look At The Fair Value Of Almirall SA. (BME:ALM)

In this article I am going to calculate the intrinsic value of Almirall SA. (BME:ALM) by estimating the company’s future cash flows and discounting them to their present value. I will use the Discounted Cash Flows (DCF) model. It may sound complicated, but actually it is quite simple! Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Please also note that this article was written in April 2018 so be sure check out the updated calculation by following the link below. View our latest analysis for Almirall

The model

I’m using the 2-stage growth model, which simply means we take in account two stages of company’s growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have perpetual stable growth rate. To start off with we need to estimate the next five years of cash flows. Where possible I use analyst estimates, but when these aren’t available I have extrapolated the previous free cash flow (FCF) from the year before. For this growth rate I used the average annual growth rate over the past five years, but capped at a reasonable level. I then discount the sum of these cash flows to arrive at a present value estimate.

5-year cash flow estimate

2018 2019 2020 2021 2022
Levered FCF (€, Millions) €102.40 €136.41 €130.35 €126.00 €121.79
Source Analyst x2 Analyst x7 Analyst x4 Extrapolated @ (-3.34%) Extrapolated @ (-3.34%)
Present Value Discounted @ 8.29% €94.56 €116.32 €102.64 €91.61 €81.77

Present Value of 5-year Cash Flow (PVCF)= €487

After calculating the present value of future cash flows in the intial 5-year period we need to calculate the Terminal Value, which accounts for all the future cash flows beyond the first stage. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 1.5%. We discount this to today’s value at a cost of equity of 8.3%.

Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = €122 × (1 + 1.5%) ÷ (8.3% – 1.5%) = €1,811

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = €1,811 / ( 1 + 8.3%)5 = €1,216

The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is €1,703. In the final step we divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) or ADR then we use the equivalent number. This results in an intrinsic value of €9.85, which, compared to the current share price of €9.57, we find that Almirall is about right, perhaps slightly undervalued at a 2.80% discount to what it is available for right now.

BME:ALM Intrinsic Value Apr 4th 18
BME:ALM Intrinsic Value Apr 4th 18

The 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 my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at Almirall as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 8.3%, which is based on a levered beta of 0.8. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Next Steps:

Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company. For ALM, there are three essential factors you should further research:

  1. Financial Health: Does ALM 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 ALM’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 High Quality Alternatives: Are there other high quality stocks you could be holding instead of ALM? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St does a DCF calculation for every ES stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.