Estimating The Fair Value Of SELVAS Healthcare, Inc. (KOSDAQ:208370)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, SELVAS Healthcare fair value estimate is ₩4,404
• Current share price of ₩4,100 suggests SELVAS Healthcare is potentially trading close to its fair value
• SELVAS Healthcare's peers are currently trading at a premium of 100% on average

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of SELVAS Healthcare, Inc. (KOSDAQ:208370) as an investment opportunity by projecting its future cash flows and then discounting them to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

See our latest analysis for SELVAS Healthcare

The Calculation

We're 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 a stable growth rate. 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.

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) estimate

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (₩, Millions)	₩3.87b	₩4.37b	₩4.81b	₩5.18b	₩5.50b	₩5.78b	₩6.03b	₩6.26b	₩6.47b	₩6.68b
Growth Rate Estimate Source	Est @ 17.61%	Est @ 13.10%	Est @ 9.94%	Est @ 7.72%	Est @ 6.17%	Est @ 5.09%	Est @ 4.33%	Est @ 3.80%	Est @ 3.43%	Est @ 3.17%
Present Value (₩, Millions) Discounted @ 7.1%	₩3.6k	₩3.8k	₩3.9k	₩3.9k	₩3.9k	₩3.8k	₩3.7k	₩3.6k	₩3.5k	₩3.4k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₩37b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 (2.6%) 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 7.1%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = ₩6.7b× (1 + 2.6%) ÷ (7.1%– 2.6%) = ₩151b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ₩151b÷ ( 1 + 7.1%)¹⁰= ₩76b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₩113b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of ₩4.1k, the company appears about fair value at a 6.9% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

The Assumptions

Now 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 SELVAS Healthcare 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 7.1%, which is based on a levered beta of 0.961. 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.

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. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. 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. For SELVAS Healthcare, we've put together three important elements you should explore:

1. Risks: To that end, you should learn about the 2 warning signs we've spotted with SELVAS Healthcare (including 1 which is a bit concerning) .
2. 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!
3. Other Top Analyst Picks: Interested to see what the analysts are thinking? Take a look at our interactive list of analysts' top stock picks to find out what they feel might have an attractive future outlook!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the KOSDAQ 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.