An Intrinsic Calculation For InnoCare Pharma Limited (HKG:9969) Suggests It's 45% Undervalued

Simply Wall St.

Jan 06

AdvertisementKey Insights Using the 2 Stage Free Cash Flow to Equity, InnoCare Pharma fair value estimate is HK$23.47 Current share price of HK$13.00 suggests InnoCare Pharma is potentially 45% ...

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Today, we will estimate the stock's intrinsic value  by taking the forecast future cash flows of the company and discounting them back to today's value.  The Discounted Cash Flow (DCF) model is the tool we will apply to do this.  Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.  Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation.  Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free. The Method   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 start off with, we need to estimate 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  2026202720282029203020312032203320342035 Levered FCF (CN¥, Millions) -CN¥317.5m-CN¥81.4mCN¥26.5mCN¥344.0mCN¥753.8mCN¥1.12bCN¥1.52bCN¥1.90bCN¥2.26bCN¥2.57bGrowth Rate Estimate SourceAnalyst x3Analyst x3Analyst x3Analyst x3Analyst x3Est @ 48.95%Est @ 35.11%Est @ 25.43%Est @ 18.64%Est @ 13.90% Present Value (CN¥, Millions) Discounted @ 7.2% -CN¥296-CN¥70.8CN¥21.5CN¥260CN¥532CN¥739CN¥932CN¥1.1kCN¥1.2kCN¥1.3k(\"Est\" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = CN¥5.7b We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period.  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 2.8%. We discount the terminal cash flows to today's value at a cost of equity of 7.2%. Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = CN¥2.6b× (1 + 2.8%) ÷ (7.2%– 2.8%) = CN¥60bPresent Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥60b÷ ( 1 + 7.2%)10= CN¥30b The total value, or equity value, is then the sum of the present value of the future cash flows,  which in this case is CN¥36b.  The last step is to then divide the equity value by the number of shares outstanding.  Compared to the current share price of HK$13.0, the company appears   quite good value    at a 45% 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. SEHK:9969 Discounted Cash Flow January 6th 2026  The 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.  You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them.  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 InnoCare Pharma 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 7.2%, which is based on a levered beta of 0.837. 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.   See our latest analysis for InnoCare Pharma SWOT Analysis for InnoCare PharmaStrength Debt is well covered by earnings. Balance sheet summary for 9969. Weakness No major weaknesses identified for 9969.Opportunity Forecast to reduce losses next year. Has sufficient cash runway for more than 3 years based on current free cash flows. Trading below our estimate of fair value by more than 20%. ThreatDebt is not well covered by operating cash flow. Is 9969 well equipped to handle threats?  Looking Ahead:  Whilst important, the DCF calculation  is only one of many factors that you need to assess for a company.  DCF models are not the be-all and end-all of investment valuation.  Rather it should be seen as a guide to \"what assumptions need to be true for this stock to be under/overvalued?\"  For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result.   Can we work out why the company is trading at a discount to intrinsic value?   For InnoCare Pharma, we've compiled three  fundamental  factors  you should explore:   Risks: For instance, we've identified   1 warning sign for InnoCare Pharma  that you should be aware of.   Future Earnings: How does 9969'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: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!   PS. Simply Wall St updates its DCF calculation for every Hong Kong stock every day, so if you want to find the intrinsic value of any other stock just search here.New: AI Stock Screener & AlertsOur new AI Stock Screener scans the market every day to uncover opportunities.• Dividend Powerhouses (3%+ Yield)• Undervalued Small Caps with Insider Buying• High growth Tech and AI CompaniesOr build your own from over 50 metrics.Explore Now for FreeHave 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.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0,"need_auth":false,"code":"91000000","status":"200"}}}