ASTRAZENECA PLC

Share Valuations Techniques Using AstraZeneca Plc



Share Valuations Techniques Using AstraZeneca Plc

Question 1

Based on Assets Value:

000s

000s

Net Assets per Balance Sheet as at 31/12/08

640

Adjustments Required:

Increase in Land & Buildings Valuation (690-200)

490

Fixtures & Fittings not required (all)

-22

Plant & Machinery not required (48-40)

-8

Lease Obligations not taken over

15

Total Adjustments

475

Adjusted Asset Valuation

1115

Divided By: Number of shares in issue (100000/.05)

200

Asset Based valuation Per Share

5.58

Based on Discounted Cash Flow:Current Operating Cash Flow = Rs. 680 MillionOperating Cash Flow CAGR = 83 %Number of Shares = 17.2 MillionAssumptions:Operating Cash Flow Growth Rate for next 10 years = 30% 35% 40%Discount Rate = 5% (Conservative Bank Yield)Operating Cash Flow CAGR is Constant for Next 10 years.I have calculated the last 3 year CAGR for Net operating cash flow and it stands at 83%. Hence, I assumed a higher growth rate of 30% 35% and 40% for operating cash flow for next 10 years.

Stock Value Based on Discounted Net Operating Cash Flow

If Operating Cash Flow Growth Rate is 30% then Stock Value = Rs.1534

If Operating Cash Flow Growth Rate is 35% then Stock Value = Rs.2018

If Operating Cash Flow Growth Rate is 40% then Stock Value = Rs.2650

If you compare the stock value between these two methods, there is huge difference and in fact the value based on Discounted Net Operating Cash Flow is almost double the value of EPS Based estimate. Why is that? Of course, if I assume same 20% growth for operating cash flow, then the value is Rs. 890 which is similar to EPS Based estimate. But does it make sense to assume 20% growth rate when the company has generated net operating cash flow at CAGR 83% for the last 3 years? I do not think so. Hence, I assumed little higher than what I assumed for EPS growth. What this analysis indicate is that market assumes that Astra Zeneca Plc Net Operating Cash flow would grow at 35% (CAGR)for next 10 years (If my assumption makes sense) and they think that stock value now is atleast Rs.2000 which is what it commands right now. You might ask why did the stock was trading at Rs. 1350 range just few days back? Well, stock price accounts and discounts for many things and I will certainly try to write an article about it in the coming days.

Stock Value based on cash flow gives better idea about the company rather than looking at just EPS. May be that's the reason, market has put huge premium on this stock. But there is also one more thing. I have in fact calculated the value based on Net Operating Cash Flow which excludes money the company raised through financing which stands at Rs. 3306 Millions as of 2008. A company without strong growth potential and fundamentals would not have raised this much money and may be investors considered that too. But my another question is, would you have ...