- New Zealand
- Healthcare Services
A Look At The Intrinsic Value Of Radius Residential Care Limited (NZSE:RAD)
- Radius Residential Care's estimated fair value is NZ$0.22 based on Dividend Discount Model
- Radius Residential Care's NZ$0.24 share price indicates it is trading at similar levels as its fair value estimate
- Radius Residential Care's peers seem to be trading at a lower premium to fair value based onthe industry average of -7.7%
Does the March share price for Radius Residential Care Limited (NZSE:RAD) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by projecting its future cash flows and then discounting them to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. It may sound complicated, but actually it is quite simple!
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.
See our latest analysis for Radius Residential Care
What's The Estimated Valuation?
We have to calculate the value of Radius Residential Care slightly differently to other stocks because it is a healthcare company. Instead of using free cash flows, which are hard to estimate and often not reported by analysts in this industry, dividends per share (DPS) payments are used. This often underestimates the value of a stock, but it can still be good as a comparison to competitors. We use the Gordon Growth Model, which assumes dividend will grow into perpetuity at a rate that can be sustained. The dividend is expected to grow at an annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.2%. We then discount this figure to today's value at a cost of equity of 6.9%. Compared to the current share price of NZ$0.2, the company appears around fair value at the time of writing. 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.
Value Per Share = Expected Dividend Per Share / (Discount Rate - Perpetual Growth Rate)
= NZ$0.01 / (6.9% – 2.2%)
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 these result, have a go at the calculation yourself and play with the 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 Radius Residential Care 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 6.9%, which is based on a levered beta of 0.800. 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 Radius Residential Care
- Earnings growth over the past year exceeded the industry.
- Interest payments on debt are not well covered.
- Dividend is low compared to the top 25% of dividend payers in the Healthcare market.
- Current share price is above our estimate of fair value.
- Shareholders have been diluted in the past year.
- RAD's financial characteristics indicate limited near-term opportunities for shareholders.
- Lack of analyst coverage makes it difficult to determine RAD's earnings prospects.
- Debt is not well covered by operating cash flow.
- Dividends are not covered by earnings.
Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. 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. For Radius Residential Care, we've put together three fundamental elements you should assess:
- Risks: Be aware that Radius Residential Care is showing 7 warning signs in our investment analysis , and 5 of those are a bit concerning...
- 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!
- Other Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!
PS. Simply Wall St updates its DCF calculation for every New Zealander stock every day, so if you want to find the intrinsic value of any other stock just search here.
Valuation is complex, but we're helping make it simple.
Find out whether Radius Residential Care is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
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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.
Radius Residential Care
Radius Residential Care Limited provides health and aged care services for elderly and disabled people in New Zealand.
Slightly overvalued with worrying balance sheet.