According to the main insight dividend discount model, Green Cross Health’s fair value estimate is NZ$1.47. As the share price currently sits at NZ$1.31, it appears that the company is trading close to its estimated fair value. However, the question remains – is this truly reflected? In order to evaluate its intrinsic value, we will need to discount the expected future cash flows to their present value using a discounted cash flow (DCF) model.
While there are other methods to estimate a company’s value, our analysis uses DPS for Green Cross Health since free cash flow is difficult to estimate and often not reported by analysts. Using the Gordon Growth Model, which assumes that dividends will grow consistently, we expect the dividend to grow at an annual growth rate similar to the 5-year average 2.2% of the 10-year Treasury yield. We then discount this figure to its present value at the cost of capital of 7.0%.
Compared to the current share price, the company appears to be at near fair value at an 11% discount. However, it’s important to remember that evaluation is an imprecise tool and that there are other factors to consider, such as potential industry cyclicality or future capital requirements.
When considering Green Cross Health as a potential shareholder, we use the cost of equity as the discount rate rather than the cost of capital with debt (or WACC). For this calculation, we’ve used 7.0% based on a leverage beta of 0.800. Beta is a measure of a stock’s volatility relative to the market, taken from industry average betas of globally comparable companies and imposing a limit of 0.8 to 2.0, which is a reasonable range for stable businesses.
While DCF calculations are important, they should not be the only metric used when researching a company. Risks and other factors, such as a company’s debt, return on equity, and track record, should also be considered. Additionally, it’s important to note that small adjustments to the terminal value growth rate can have a significant impact on overall results.
At Simply Wall St, we update our DCF calculations daily for all New Zealand stocks. If you have any feedback or questions, please don’t hesitate to contact us directly.