Are Investors Undervaluing CSAM Health Group AS (OB:CSAM) By 44%?

Key Insights

• The projected fair value for CSAM Health Group is kr81.03 based on 2 Stage Free Cash Flow to Equity
• CSAM Health Group's kr45.20 share price signals that it might be 44% undervalued
• CSAM Health Group's peers are currently trading at a premium of 52% on average

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of CSAM Health Group AS (OB:CSAM) as an investment opportunity by projecting its future cash flows and then discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. There's really not all that much to it, even though it might appear quite complex.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

Check out our latest analysis for CSAM Health Group

Is CSAM Health Group Fairly Valued?

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. 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 discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) estimate

	2023	2024	2025	2026	2027	2028	2029	2030	2031	2032
Levered FCF (NOK, Millions)	kr11.0m	kr87.0m	kr104.0m	kr116.4m	kr126.5m	kr134.8m	kr141.5m	kr147.0m	kr151.6m	kr155.5m
Growth Rate Estimate Source	Analyst x1	Analyst x1	Analyst x1	Est @ 11.88%	Est @ 8.73%	Est @ 6.52%	Est @ 4.98%	Est @ 3.89%	Est @ 3.14%	Est @ 2.61%
Present Value (NOK, Millions) Discounted @ 8.5%	kr10.1	kr73.9	kr81.4	kr84.0	kr84.1	kr82.6	kr79.9	kr76.5	kr72.7	kr68.8

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = kr714m

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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 (1.4%) 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 8.5%.

Terminal Value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = kr156m× (1 + 1.4%) ÷ (8.5%– 1.4%) = kr2.2b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= kr2.2b÷ ( 1 + 8.5%)¹⁰= kr978m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is kr1.7b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of kr45.2, the company appears quite undervalued at a 44% 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

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 CSAM Health 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 8.5%, which is based on a levered beta of 1.201. 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.

Looking Ahead:

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. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Can we work out why the company is trading at a discount to intrinsic value? For CSAM Health Group, we've compiled three further factors you should consider:

1. Risks: For example, we've discovered 2 warning signs for CSAM Health Group (1 is concerning!) that you should be aware of before investing here.
2. Future Earnings: How does CSAM'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: Do you like a good all-rounder? 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 valuation for every stock on the OB 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.