Yahoo Finance Medical Developments International Limited (ASX:MVP) Is Trading At A 19.72% Discount
In this article I am going to calculate the intrinsic value of Medical Developments International Limited (ASX:MVP) 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. Don’t get put off by the jargon, the math behind it is actually quite straightforward. 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. If you are reading this and its not June 2018 then I highly recommend you check out the latest calculation for Medical Developments International by following the link below. See our latest analysis for Medical Developments International
What’s the value?
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. To begin with we have to get estimates of 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 this to its value today and sum up the total to get the present value of these cash flows.
5-year cash flow forecast
2018 | 2019 | 2020 | 2021 | 2022 | |
Levered FCF (A$, Millions) | A$-5.65 | A$5.75 | A$26.75 | A$30.71 | A$35.26 |
Source | Analyst x2 | Analyst x2 | Analyst x2 | Extrapolated @ (14.82%) | Extrapolated @ (14.82%) |
Present Value Discounted @ 9.19% | A$-5.17 | A$4.82 | A$20.55 | A$21.61 | A$22.72 |
Present Value of 5-year Cash Flow (PVCF)= AU$64.53m
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 an annual growth rate equal to the 10-year government bond rate of 2.8%. We discount this to today’s value at a cost of equity of 9.2%.
Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = AU$35.26m × (1 + 2.8%) ÷ (9.2% – 2.8%) = AU$565.01m
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = AU$565.01m ÷ ( 1 + 9.2%)5 = AU$364.06m
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is AU$428.58m. The last step is to then 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) then we use the equivalent number. This results in an intrinsic value of A$7.24. Compared to the current share price of A$5.82, the stock is about right, perhaps slightly undervalued at a 19.72% discount to what it is available for right now.
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 my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Medical Developments International 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 9.2%, which is based on a levered beta of 0.888. 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:
Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company. For MVP, I’ve put together three essential factors you should further research:
Financial Health: Does MVP 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.
Future Earnings: How does MVP’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 High Quality Alternatives: Are there other high quality stocks you could be holding instead of MVP? 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 ASX every 6 hours. If you want to find the calculation for other stocks just search here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
