Advertisement
U.S. markets open in 1 hour 53 minutes
  • S&P Futures

    5,073.75
    -16.25 (-0.32%)
     
  • Dow Futures

    38,897.00
    -119.00 (-0.31%)
     
  • Nasdaq Futures

    17,949.00
    -72.00 (-0.40%)
     
  • Russell 2000 Futures

    2,044.00
    -15.90 (-0.77%)
     
  • Crude Oil

    78.03
    -0.84 (-1.07%)
     
  • Gold

    2,038.10
    -6.00 (-0.29%)
     
  • Silver

    22.55
    -0.21 (-0.91%)
     
  • EUR/USD

    1.0815
    -0.0033 (-0.30%)
     
  • 10-Yr Bond

    4.3150
    0.0000 (0.00%)
     
  • Vix

    13.78
    +0.35 (+2.61%)
     
  • GBP/USD

    1.2644
    -0.0042 (-0.33%)
     
  • USD/JPY

    150.6360
    +0.1560 (+0.10%)
     
  • Bitcoin USD

    59,376.79
    +2,245.79 (+3.93%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • FTSE 100

    7,626.05
    -56.97 (-0.74%)
     
  • Nikkei 225

    39,208.03
    -31.49 (-0.08%)
     

Estimating The Fair Value Of ZoomerMedia Limited (CVE:ZUM)

Key Insights

  • ZoomerMedia's estimated fair value is CA$0.04 based on 2 Stage Free Cash Flow to Equity

  • Current share price of CA$0.04 suggests ZoomerMedia is potentially trading close to its fair value

  • ZoomerMedia's peers seem to be trading at a higher discount to fair value based onthe industry average of 9.7%

Today we will run through one way of estimating the intrinsic value of ZoomerMedia Limited (CVE:ZUM) by estimating the company's 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.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

See our latest analysis for ZoomerMedia

Step By Step Through The Calculation

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 discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

Levered FCF (CA$, Millions)

CA$3.06m

CA$2.57m

CA$2.29m

CA$2.13m

CA$2.04m

CA$1.99m

CA$1.97m

CA$1.97m

CA$1.97m

CA$1.99m

Growth Rate Estimate Source

Est @ -23.93%

Est @ -16.17%

Est @ -10.74%

Est @ -6.94%

Est @ -4.28%

Est @ -2.42%

Est @ -1.11%

Est @ -0.20%

Est @ 0.44%

Est @ 0.89%

Present Value (CA$, Millions) Discounted @ 8.9%

CA$2.8

CA$2.2

CA$1.8

CA$1.5

CA$1.3

CA$1.2

CA$1.1

CA$1.0

CA$0.9

CA$0.8

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CA$15m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (1.9%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 8.9%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = CA$2.0m× (1 + 1.9%) ÷ (8.9%– 1.9%) = CA$29m

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CA$29m÷ ( 1 + 8.9%)10= CA$12m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is CA$27m. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of CA$0.04, the company appears about fair value at a 0.2% discount to where the stock price trades currently. 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.

dcf
dcf

Important Assumptions

Now 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 ZoomerMedia 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 8.9%, which is based on a levered beta of 1.392. 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 ZoomerMedia

Strength

  • Debt is well covered by cash flow.

  • Dividend is in the top 25% of dividend payers in the market.

Weakness

  • Interest payments on debt are not well covered.

  • Shareholders have been diluted in the past year.

Opportunity

  • Has sufficient cash runway for more than 3 years based on current free cash flows.

  • Current share price is below our estimate of fair value.

  • Lack of analyst coverage makes it difficult to determine ZUM's earnings prospects.

Threat

  • Dividends are not covered by cash flow.

Moving On:

Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for 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 instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For ZoomerMedia, we've put together three additional items you should assess:

  1. Risks: For instance, we've identified 5 warning signs for ZoomerMedia (3 are potentially serious) you should be aware of.

  2. 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!

  3. 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 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.

Advertisement