Key Insights
- BeiGene's estimated fair value is US$228 based on 2 Stage Free Cash Flow to Equity
- BeiGene's US$219 share price indicates it is trading at similar levels as its fair value estimate
- Our fair value estimate is 26% lower than BeiGene's analyst price target of US$308
In this article we are going to estimate the intrinsic value of BeiGene, Ltd. (NASDAQ:BGNE) by estimating the company's future cash flows and discounting them to their present value. Our analysis will employ the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
Check out our latest analysis for BeiGene
What's The Estimated Valuation?
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) estimate
| 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | |
| Levered FCF ($, Millions) | -US$1.47b | -US$934.5m | -US$293.9m | US$662.9m | US$956.4m | US$1.19b | US$1.39b | US$1.57b | US$1.72b | US$1.85b |
| Growth Rate Estimate Source | Analyst x11 | Analyst x10 | Analyst x8 | Analyst x5 | Analyst x4 | Est @ 23.98% | Est @ 17.41% | Est @ 12.81% | Est @ 9.59% | Est @ 7.33% |
| Present Value ($, Millions) Discounted @ 6.8% | -US$1.4k | -US$819 | -US$241 | US$509 | US$688 | US$798 | US$877 | US$926 | US$950 | US$955 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$3.3b
The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.1%. We discount the terminal cash flows to today's value at a cost of equity of 6.8%.
Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = US$1.8b× (1 + 2.1%) ÷ (6.8%– 2.1%) = US$40b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$40b÷ ( 1 + 6.8%)10= US$21b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$24b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of US$219, the company appears about fair value at a 3.8% 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.
The Assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 BeiGene 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 6.8%, 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 BeiGene
- Debt is well covered by earnings.
- No major weaknesses identified for BGNE.
- Forecast to reduce losses next year.
- Current share price is below our estimate of fair value.
- Debt is not well covered by operating cash flow.
- Has less than 3 years of cash runway based on current free cash flow.
- Not expected to become profitable over the next 3 years.
Next Steps:
Whilst important, the DCF calculation 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. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For BeiGene, there are three further aspects you should further research:
- Risks: For example, we've discovered 2 warning signs for BeiGene that you should be aware of before investing here.
- Future Earnings: How does BGNE'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.
- 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!
PS. Simply Wall St updates its DCF calculation for every American 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 here to simplify it.
Discover if BeiGene might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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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.
About NasdaqGS:BGNE
BeiGene
An oncology company, engages in discovering and developing various treatments for cancer patients in the United States, China, Europe, and internationally.
Undervalued with reasonable growth potential.
