Does This Valuation Of SilverCrest Metals Inc. (TSE:SIL) Imply Investors Are Overpaying?
Key Insights
Using the 2 Stage Free Cash Flow to Equity, SilverCrest Metals fair value estimate is CA$4.95
SilverCrest Metals' CA$6.59 share price signals that it might be 33% overvalued
The US$9.00 analyst price target for SIL is 82% more than our estimate of fair value
Today we will run through one way of estimating the intrinsic value of SilverCrest Metals Inc. (TSE:SIL) by taking the expected future cash flows and discounting them to their present value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
View our latest analysis for SilverCrest Metals
The Model
We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) estimate
2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | |
Levered FCF ($, Millions) | US$51.7m | US$48.0m | US$48.5m | US$40.0m | US$35.3m | US$32.6m | US$31.1m | US$30.2m | US$29.8m | US$29.7m |
Growth Rate Estimate Source | Analyst x5 | Analyst x4 | Analyst x4 | Est @ -17.47% | Est @ -11.67% | Est @ -7.61% | Est @ -4.77% | Est @ -2.78% | Est @ -1.39% | Est @ -0.41% |
Present Value ($, Millions) Discounted @ 7.4% | US$48.1 | US$41.6 | US$39.1 | US$30.0 | US$24.7 | US$21.2 | US$18.8 | US$17.0 | US$15.6 | US$14.5 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$271m
The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. 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 1.9%. We discount the terminal cash flows to today's value at a cost of equity of 7.4%.
Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$30m× (1 + 1.9%) ÷ (7.4%– 1.9%) = US$542m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$542m÷ ( 1 + 7.4%)10= US$265m
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$535m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of CA$6.6, the company appears potentially overvalued at the time of writing. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.
Important 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. 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 SilverCrest Metals 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 7.4%, which is based on a levered beta of 1.115. 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 SilverCrest Metals
Strength
Currently debt free.
Weakness
Expensive based on P/E ratio and estimated fair value.
Opportunity
SIL's financial characteristics indicate limited near-term opportunities for shareholders.
Threat
Annual earnings are forecast to decline for the next 3 years.
Looking Ahead:
Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. What is the reason for the share price exceeding the intrinsic value? For SilverCrest Metals, we've put together three essential elements you should further research:
Risks: Be aware that SilverCrest Metals is showing 1 warning sign in our investment analysis , you should know about...
Future Earnings: How does SIL's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. Simply Wall St updates its DCF calculation for every Canadian stock every day, so if you want to find the intrinsic value of any other stock 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.
