I'll try to make an estimate of what would be DASA Free Cash Flow. It's a very interesting company, but it's very hard to analyse it.
Investments in Work Capital
Inventories and receivables has been quite steady between the range of 25-30% of net revenue since 2005. The average is 26.5%. On the other hand, suppliers are floating around 4-5%, in an average of 4.3%. So the net investment in work capital historically has been around 25% of net revenue growth.
That is, if revenue grows from 1 bi to 1.1 bi we can expect a net investment in work capital of 25 millions.
Investments in Assets
From the graph below we can see that investments is decreasing and in the last 3 years has been in an average of 7.5% of net revenue. I've made no adjustments in the amount of investments reported.
So, if revenue grows to 1.1 bi, we can expect investments of about 80 millions.
Cash Flow
To estimate cash flow from operations I'll use this table, that shows EBITDA margin of Dasa main competitors (U.S. and Brazil):
EBITDA margin is usually over 20%. Dasa has currently EBITDA margin of 26.7% and it projects margin of 25.0% for the long run.
Interest expenses has an average of 4.4% of net revenue. But currently is at about 7.0%. So I'll consider a financial expense of 6.0% of net revenue from here now on.
With this numbers, and considering a tax rate of 24.0% (Dasa has a lot of goodwill to be compensated in next years), my estimated cash flow is (25.0% - 6.0%) x (1 - 24.0%) = 14.4% of net revenue.
I think that my premises are quite reasonable, since the CFO, as reported, is at an average of 14.9% in the last 3 years: 13.5%, 15.5% and 15.7%.
Valuation
If there is a chance of my assumptions being reasonable right and if I haven't made any mistake, FCF would be 14.4% of net revenue less 7.5% of investments in assets and less 2.0% of investments in work capital (revenue growth of 8% x 25%): around 5.0%.
My valuation, discounted at 10% rate, available at Google Docs, gives a company value of 3 billions. Market value is 60% above.
Maybe I'm exaggerating a bit on capital expenses. It's possible that Dasa can grow in revenue (and cash) without having to buy new equipment. For example, it spends 3 millions to buy an equipment that can process 10.000 exams per day. For the next 2 years demand is just 5.000 exams per day. So revenue and cash can grow without expense as demand grows until reach the full capacity.
What you think about?
5 comments:
I like the working capital calculation, but I think the fixed asset calculation is only useful when it's stable, like that case. It could be an approximation of the minimum CAPEX required to keep the business going, or a better proxy for depreciation.
Anyway, there's too much hype and thrill about the health care sector. I think it's very rare for the value investor to buy stocks of companies in hyped sectors, except in exceptional and glorius moments of total market meltdown or a serius distress about a particular company.
As a quality indicator of the FCF power of a company I think it's important to calculate the working capital/revenues and compare it with the operational margin, so to figure out the effect of growth in the FCF. Companies that require little working capital to grow should deserve a higher growth rate in my DCF calculations.
O autoexame da Dasa
You should consider that Dasa 25% EBITDA margin for the long run accounts 150 bps of pre-operational expenditures because of aggressive new PSCs openings in the coming years. As you consider no LT real growth in your valuation, a 26.5% margin would be fairer. Your CAPEX for a no real growth company in the long run definitely is underestimating FCF, especially under a better asset turnover prospect. You should make CAPEX equal depreciation.
Another point you are neglecting in your valuation is the change in debt structure among the years. You should account the issued or paid debt in the FCFE. The way you are doing there is a strong input that debt won’t change over the years. If so, leverage would fall as the company generates cash. Once this scenario is true you should at least believe that investors asked Ke´s would be smaller.
ROIC:
About EBITDA margin I prefer to maintain 25%, since all of its competitors have lower margins.
About debt, company can pay it or pay dividends instead. More important is to estimate FREE cash flow.
And about CAPEX, yes, that's the main problem. But I point out that: depreciation is currently already at 5.2% of revenue and at my model company is always growing (from 8% to 3%). That's real growth, so if you consider inflation, DASA revenue will grow from 13% to 8% per year. So I don't think that investments is too much overestimated.
Post a Comment
We encourage your feedback and we will take your comments into serious consideration. However, you must be warned that any comment that does not follow the blog philosophy (Value Investing and Behavioural Finance) will be promptly removed.