Hyphens Pharma International Limited (Catalist:1J5) Shares Could Be 50% Below Their Intrinsic Value Estimate

Simply Wall St
·6 min read

Key Insights

  • The projected fair value for Hyphens Pharma International is S$0.69 based on 2 Stage Free Cash Flow to Equity

  • Hyphens Pharma International's S$0.34 share price signals that it might be 50% undervalued

  • The average premium for Hyphens Pharma International's competitorsis currently 244%

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Hyphens Pharma International Limited (Catalist:1J5) as an investment opportunity by estimating the company's future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model on this occasion. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. 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 Hyphens Pharma International

The Calculation

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To begin with, we have to get estimates of the next ten years of cash flows. 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 need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) forecast

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

Levered FCF (SGD, Millions)

S$6.41m

S$16.8m

S$11.2m

S$11.1m

S$11.1m

S$11.2m

S$11.3m

S$11.4m

S$11.6m

S$11.8m

Growth Rate Estimate Source

Analyst x1

Analyst x1

Analyst x1

Est @ -0.90%

Est @ -0.05%

Est @ 0.54%

Est @ 0.96%

Est @ 1.25%

Est @ 1.45%

Est @ 1.60%

Present Value (SGD, Millions) Discounted @ 6.7%

S$6.0

S$14.8

S$9.2

S$8.6

S$8.0

S$7.6

S$7.2

S$6.8

S$6.5

S$6.2

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = S$81m

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 (1.9%) 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 6.7%.

Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = S$12m× (1 + 1.9%) ÷ (6.7%– 1.9%) = S$252m

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= S$252m÷ ( 1 + 6.7%)10= S$132m

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is S$213m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of S$0.3, the company appears quite good value at a 50% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf
dcf

Important Assumptions

We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 Hyphens Pharma International 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 6.7%, 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 Hyphens Pharma International

Strength

  • Earnings growth over the past year exceeded the industry.

  • Debt is not viewed as a risk.

  • Dividends are covered by earnings and cash flows.

Weakness

  • Dividend is low compared to the top 25% of dividend payers in the Pharmaceuticals market.

Opportunity

  • Annual earnings are forecast to grow faster than the Singaporean market.

  • Trading below our estimate of fair value by more than 20%.

Threat

  • No apparent threats visible for 1J5.

Moving On:

Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for 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 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 Hyphens Pharma International, there are three additional factors you should look at:

  1. Risks: Be aware that Hyphens Pharma International is showing 2 warning signs in our investment analysis , you should know about...

  2. Future Earnings: How does 1J5'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 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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the CATALIST every day. If you want to find the calculation for other stocks just search here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here