Estimating The Intrinsic Value Of BioSyent Inc. (CVE:RX)

Key Insights

• BioSyent's estimated fair value is CA$8.41 based on 2 Stage Free Cash Flow to Equity

• Current share price of CA$7.64 suggests BioSyent is potentially trading close to its fair value

• Peers of BioSyent are currently trading on average at a 13% premium

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of BioSyent Inc. (CVE:RX) as an investment opportunity by taking the forecast future cash flows of the company and discounting them back to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.

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. 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 BioSyent

Is BioSyent Fairly Valued?

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, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (CA$, Millions)	CA$4.76m	CA$4.55m	CA$4.43m	CA$4.38m	CA$4.36m	CA$4.38m	CA$4.41m	CA$4.46m	CA$4.52m	CA$4.59m
Growth Rate Estimate Source	Est @ -7.10%	Est @ -4.41%	Est @ -2.53%	Est @ -1.21%	Est @ -0.29%	Est @ 0.35%	Est @ 0.81%	Est @ 1.12%	Est @ 1.34%	Est @ 1.50%
Present Value (CA$, Millions) Discounted @ 5.9%	CA$4.5	CA$4.1	CA$3.7	CA$3.5	CA$3.3	CA$3.1	CA$3.0	CA$2.8	CA$2.7	CA$2.6

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CA$33m

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 5.9%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = CA$4.6m× (1 + 1.9%) ÷ (5.9%– 1.9%) = CA$117m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CA$117m÷ ( 1 + 5.9%)¹⁰= CA$66m

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$99m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of CA$7.6, the company appears about fair value at a 9.2% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the 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 BioSyent 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 5.9%, which is based on a levered beta of 0.800. 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 BioSyent

Strength

• Currently debt free.

• Dividends are covered by earnings and cash flows.

Weakness

• Earnings declined over the past year.

• Dividend is low compared to the top 25% of dividend payers in the Pharmaceuticals market.

Opportunity

• Annual revenue is forecast to grow faster than the Canadian market.

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

Threat

• No apparent threats visible for RX.

Next Steps:

Valuation is only one side of the coin in terms of building your investment thesis, and 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 BioSyent, there are three important elements you should explore:

1. Risks: For example, we've discovered 2 warning signs for BioSyent that you should be aware of before investing here.

2. Future Earnings: How does RX'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.

3. 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.

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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.