Calculation of fair value of Fintech Select Ltd. (CVE:FTEC)
Key insight
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The estimated fair value of Fintech Select is CA$0.034 based on 2-step free cash flow to equity
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With a share price of $0.03, Fintech Select appears to be trading close to its estimated fair value
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Fintech Select’s peers currently trade at a premium of 19% on average
In this article, we will estimate the intrinsic value of Fintech Select Ltd. (CVE:FTEC) by estimating the company’s future cash flows and discounting them to present value. Our analysis will use the discounted cash flow (DCF) model. There really isn’t much to it, although it may seem quite complex.
We would caution that there are many ways to value a company, and like DCF, each technique has advantages and disadvantages in certain scenarios. For those interested in stock analysis, the Simply Wall St analysis model here may be of interest to you.
See our latest analysis for Fintech Select
What is the estimated valuation?
We use the 2-stage growth model, which simply means that we take into account two stages of the company’s growth. In the initial period, the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To begin with, we need to estimate the next ten years of cash flows. Since no analyst estimates of free cash flow are available to us, we have extrapolated the previous free cash flow (FCF) from the company’s most recently reported value. We assume that companies with shrinking free cash flow will slow the rate of contraction, and that companies with increasing free cash flow will see their growth slow over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is about the idea that a dollar in the future is worth less than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) estimate
|
2023 |
2024 |
2025 |
2026 |
2027 |
2028 |
2029 |
2030 |
2031 |
2032 |
|
|
Leveraged FCF (CA$, million) |
CA$184.3,000 |
CA$181.9,000 |
CA$181.2k |
CA$181.7k |
CA$183.0k |
CA$184.8,000 |
CA$187.1k |
CA$189.8k |
CA$192.6k |
CA$195.7k |
|
Source of estimate for growth |
Est @ -2.62% |
Est @ -1.31% |
Est @ -0.39% |
Est @ 0.26% |
Est @ 0.71% |
Est @ 1.02% |
Est @ 1.24% |
Est @ 1.40% |
Est @ 1.51% |
Est @ 1.58% |
|
Present value (CA$, million) discounted @ 7.9% |
0.2 CA$ |
0.2 CA$ |
CA$0.1 |
CA$0.1 |
CA$0.1 |
CA$0.1 |
CA$0.1 |
CA$0.1 |
CA$0.1 |
CA$0.09 |
(“Est” = FCF growth rate estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = CA$1.2 million
We must now calculate the terminal value, which accounts for all 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 Treasury bond yield of 1.8%. We discount the terminal cash flows to their present value at a cost of equity of 7.9%.
Terminal value (TV)= FCF2032 × (1 + g) ÷ (r – g) = CA$196k× (1 + 1.8%) ÷ (7.9%–1.8%) = CA$3.2m
Present value of terminal value (PVTV)= TV / (1 + r)10= CA$3.2m÷ (1 + 7.9%)10= CA$1.5 million
The total value is the sum of the cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is CA$2.8 million. In the last step, we divide the equity value by the number of outstanding shares. Compared to the current share price of CA$0.03, the company appears at approximately fair value at a 13% discount to where the share price is currently trading. However, valuations are imprecise instruments, rather like a telescope – move a few degrees and you end up in another galaxy. Keep this in mind.
Preconditions
We would like to point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. Part of investing is coming up with your own evaluation of a company’s future performance, so try the math yourself and check your own assumptions. DCF also does not consider the possible cyclicality of an industry, or a company’s future capital requirements, so it does not provide a complete picture of a company’s potential performance. Given that we are looking at Fintech Select 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 have used 7.9%, which is based on a delivered beta of 1.039. Beta is a measure of a stock’s volatility, compared to the market as a whole. We derive 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.
SWOT analysis for Fintech Select
Strength
Weakness
Possibility
Threat
Next step:
Valuation is only one side of the coin when it comes to building your investment case, and it shouldn’t be the only metric you look at when researching a company. DCF models are not the be-all and end-all in the valuation of investments. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under/overvalued?” For example, changes in the company’s cost of equity or the risk-free interest rate can significantly affect the valuation. For Fintech Select, there are three relevant aspects you should consider:
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Risks: For example, we have discovered 7 warning signs for Fintech Select (4 are potentially serious!) that you should be aware of before investing here.
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Other solid businesses: Low debt, a high return on equity and good past results are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
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Other environmentally friendly companies: Concerned about the environment and think consumers will buy more and more environmentally friendly products? Browse our interactive list of companies thinking about a greener future to find some stocks you might not have thought of!
PS. The Simply Wall St app performs a discounted cash flow value for each stock on the TSXV every day. If you want to find the calculation for other shares, just search here.
Do you have feedback on this article? Worried about the content? Contact with us directly. Alternatively, you can email the editors (at) simplywallst.com.
This article by Simply Wall St is general. We provide commentary based on historical data and analyst forecasts only using an objective methodology, and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares, and does not take into account your goals or your financial situation. We aim to provide you with long-term focused analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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