Is Almirall SA (BME:ALM) Expensive For A Reason? A Look At The Intrinsic Value

How far off is Almirall SA (BME:ALM) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced by taking the foreast future cash flows of the company and discounting them back to today’s value. I will be using the Discounted Cash Flows (DCF) model. It may sound complicated, but actually it is quite simple! If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model. Please also note that this article was written in June 2018 so be sure check out the updated calculation by following the link below. Check out our latest analysis for Almirall

The model

I use what is known as a 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the first stage is higher growth, and the second stage is a more stable growth phase. 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 forecast

2018 2019 2020 2021 2022
Levered FCF (€, Millions) €118.90 €134.85 €141.66 €114.00 €109.86
Source Analyst x2 Analyst x6 Analyst x5 Analyst x1 Extrapolated @ (-3.63%)
Present Value Discounted @ 8.26% €109.83 €115.06 €111.66 €83.00 €73.89

Present Value of 5-year Cash Flow (PVCF)= €493.44m

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 1.3%. We discount this to today’s value at a cost of equity of 8.3%.

Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = €109.86m × (1 + 1.3%) ÷ (8.3% – 1.3%) = €1.60b

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = €1.60b ÷ ( 1 + 8.3%)5 = €1.07b

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is €1.57b. 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 €9.01. Compared to the current share price of €11.46, the stock is fair value, maybe slightly overvalued at the time of writing.

BME:ALM Intrinsic Value June 29th 18
BME:ALM Intrinsic Value June 29th 18

The assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don’t have to agree with my inputs, I recommend redoing the calculations yourself and playing with them. 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 0.800. 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:

Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For ALM, I’ve compiled three key aspects 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. The Simply Wall St app conducts a discounted cash flow for every stock on the BME every 6 hours. If you want to find the calculation for other stocks just search here.