Fair Value DiscussionI've seen some numbers being thrown around as to what DIV's fair value is, so I thought I would publihs my own view.
Assumptions: - General thesis: on a sum of parts, DIV should trade at what relative peers are trading at from a cash yield perspective.
- "cash yield" is the free cash flow generated divided by the current share price . note, this is sometimes different from dividend yield.
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No News Value Range: low end range calculated using Alaris current yield (note that while more diversifeid, Alaris' royalty is more trouble and of lesser quality to DIV, so it should not trade very far below this). Upper end calculated using Keg Royalties (single asset royalty, but highest cash yield of the peers apart from Alaris).
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w/ Acquisition Range: Assumed a $100m deal stream $12m in annual payments using balance sheet cash and balance funded by bank debt. Low end uses Alaris for Cash Yield and high en duses Keg (same as no news scenario).
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Target Price: Low end uses existing cash flows and an average cash yield of the 3 highest peers along with balance sheet cash assuming dividend funded to end of September 2017. High End assumes a $100m deal and uses the current implied yield of DIV if excess cash is stripped out.
Conclusions: - DIV should not trade below $2.22 as doing so would give it a higher cash yield than Alaris which has a royalty portfolio with numerous problems.
- Given DIV's current portfolio performance, but taking into accont the fact no new deal has been announced, DIV should be trading closer to the $2.50 range if you think a deal could be done by end of September.
- See upside to about $2.90-$3.50 depending on deal sizing and quality.
- Should a deal be larger than cash on hand, dont expect DIV to issue equity. They have plenty of bank debt room and going that route would be much more financially accretive given the share price.
Happy to answer questions on this.
