Calculating The Fair Value Of Fintech Select Ltd. (CVE:FTEC)
Key Insights
The projected fair value for Fintech Select is CA$0.034 based on 2 Stage Free Cash Flow to Equity
With CA$0.03 share price, Fintech Select appears to be trading close to its estimated fair value
Fintech Select's peers are currently trading at a premium of 19% on average
In this article we are going to estimate the intrinsic value of Fintech Select Ltd. (CVE:FTEC) by estimating the company's future cash flows and discounting them to their present value. Our analysis will employ the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
See our latest analysis for Fintech Select
What's The Estimated Valuation?
We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To start off with, we need to estimate the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) estimate
2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | |
Levered FCF (CA$, Millions) | CA$184.3k | CA$181.9k | CA$181.2k | CA$181.7k | CA$183.0k | CA$184.8k | CA$187.1k | CA$189.8k | CA$192.6k | CA$195.7k |
Growth Rate Estimate Source | Est @ -2.62% | Est @ -1.31% | Est @ -0.39% | Est @ 0.26% | Est @ 0.71% | Est @ 1.02% | Est @ 1.24% | Est @ 1.40% | Est @ 1.51% | Est @ 1.58% |
Present Value (CA$, Millions) Discounted @ 7.9% | CA$0.2 | CA$0.2 | 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$1.2m
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 1.8%. We discount the terminal cash flows to today's 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$1.5m
The total value is the sum of 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$2.8m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of CA$0.03, the company appears about fair value at a 13% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.
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. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own assumptions. 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 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've used 7.9%, which is based on a levered beta of 1.039. 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.
SWOT Analysis for Fintech Select
Strength
Earnings growth over the past year exceeded the industry.
Debt is well covered by earnings and cashflows.
Weakness
No major weaknesses identified for FTEC.
Opportunity
Current share price is below our estimate of fair value.
Lack of analyst coverage makes it difficult to determine FTEC's earnings prospects.
Threat
Total liabilities exceed total assets, which raises the risk of financial distress.
Next Steps:
Valuation is only one side of the coin in terms of building your investment thesis, 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 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 example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Fintech Select, there are three relevant aspects you should consider:
Risks: For example, we've discovered 7 warning signs for Fintech Select (4 are potentially serious!) that you should be aware of before investing here.
Other Solid Businesses: Low debt, high returns on equity and good past performance 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!
Other Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!
PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the TSXV every day. If you want to find the calculation for other stocks just search here.
Have 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.
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