Calculating The Intrinsic Value Of D-BOX Technologies Inc. (TSE:DBO)
Key Insights
D-BOX Technologies' estimated fair value is CA$0.11 based on 2 Stage Free Cash Flow to Equity
With CA$0.09 share price, D-BOX Technologies appears to be trading close to its estimated fair value
Today we'll do a simple run through of a valuation method used to estimate the attractiveness of D-BOX Technologies Inc. (TSE:DBO) as an investment opportunity by taking the expected future cash flows and discounting them to their present value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
Check out our latest analysis for D-BOX Technologies
The Method
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To start off with, we need to estimate the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) forecast
2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | |
Levered FCF (CA$, Millions) | CA$451.2k | CA$674.4k | CA$911.9k | CA$1.14m | CA$1.35m | CA$1.53m | CA$1.68m | CA$1.81m | CA$1.92m | CA$2.01m |
Growth Rate Estimate Source | Est @ 69.80% | Est @ 49.46% | Est @ 35.22% | Est @ 25.25% | Est @ 18.27% | Est @ 13.39% | Est @ 9.97% | Est @ 7.57% | Est @ 5.90% | Est @ 4.73% |
Present Value (CA$, Millions) Discounted @ 8.0% | CA$0.4 | CA$0.6 | CA$0.7 | CA$0.8 | CA$0.9 | CA$1.0 | CA$1.0 | CA$1.0 | CA$1.0 | CA$0.9 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CA$8.3m
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 2.0%. We discount the terminal cash flows to today's value at a cost of equity of 8.0%.
Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = CA$2.0m× (1 + 2.0%) ÷ (8.0%– 2.0%) = CA$34m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CA$34m÷ ( 1 + 8.0%)10= CA$16m
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$24m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of CA$0.09, the company appears about fair value at a 17% 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.
Important Assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 D-BOX Technologies 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 8.0%, which is based on a levered beta of 1.314. 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 D-BOX Technologies
Strength
Debt is well covered by cash flow.
Weakness
Interest payments on debt are not well covered.
Opportunity
Current share price is below our estimate of fair value.
Lack of analyst coverage makes it difficult to determine DBO's earnings prospects.
Threat
No apparent threats visible for DBO.
Looking Ahead:
Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For D-BOX Technologies, there are three pertinent factors you should assess:
Risks: Be aware that D-BOX Technologies is showing 1 warning sign in our investment analysis , you should know about...
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 Top Analyst Picks: Interested to see what the analysts are thinking? Take a look at our interactive list of analysts' top stock picks to find out what they feel might have an attractive future outlook!
PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the TSX every day. If you want to find the calculation for other stocks just search here.
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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.
