Santova Valuation

April 17, 2024
Josh Viljoen
Josh Viljoen

Unpacking the instrinsic value of Santova using a bear, base and bull case


In this post I will be unpacking what I think the intrinsic value of Santova (JSE:SNV) is based on my fair value model. Based on my calculations I have derived the following fair value estimates:


  1. Bear Case: R5.92
  2. Base Case: R9.08
  3. Bull Case: R16.73


The share is currently trading at R9.55 and thus if you wanted to achieve the required hurdle rate of return per my base case estimate (15.54% per annum) I would look to only purchase the stock if it had to drop below R9.08.


The valuation model applies the following formula:


EPS x (1 + g)^t x PE / (1 + discount rate)^t


While this formula may look complex essentially what the formula does is the following:


  1. Takes a sustainability EPS per share at present and grows this earnings per share out by 5-years
  2. Estimates the value of the share by taking the EPS in 5-years and multiplying it by what we expect the PE to be in 5 years
  3. Discount the value of the share pack to a present value today using a discount rate / required rate of return


The formula has used the following assumptions:


  1. Starting point is basic earnings per share per financials 2023 financial statements for all three scenarios
  2. For the bear case I have assumed an inflationary growth rate of 6.50%, in respect of the base case I have assumed a growth rate of 10% assuming a slow down from the historical 5-year revenue CAGR and lastly in respect of the bull case I have assumed a growth rate of 15% consistent with the revenue growth rate over the past 5-years. Note that the EPS has grown historically faster than revenue however a large portion of this is attributable to foreign currency gains due to the devaluation of the rand.
  3. For the assumed PE in 5 year's time I have assumed no rating / minor derating by the market of the current price to earnings ratio, for the base case I have assumed the market will rerate the share upwards from the current PE ratio 6.42 to 7.5 and lastly in respect of the of the bull case I have assumed the stock will rerate upwards and trade a slight premium to the PE of the JSE all share index which currently trades at a PE of 8.6.
  4. The cash flows have been discounted using current yield of R2030 government bonds of 11.14% and adding an equity risk premium of 5 for the bear case, 4 for the base case and 3 for the bull case. 


This post is for educational purposes only and should be construed as financial advice. All valuation models are subject to inherent imprecision and bias. 

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