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Estimating The Intrinsic Value Of Points International Ltd (TSE:PTS)

In this article I am going to calculate the intrinsic value of Points International Ltd (TSE:PTS) by taking the foreast future cash flows of the company and discounting them back to today’s value. This is done using the discounted cash flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model. If you are reading this and its not September 2018 then I highly recommend you check out the latest calculation for Points International by following the link below.

Check out our latest analysis for Points International

The model

I use what is known as a 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the first stage is higher growth, and the second stage is a more stable growth phase. To begin with we have to get estimates of the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount the sum of these cash flows to arrive at a present value estimate.

5-year cash flow estimate

2019

2020

2021

2022

2023

Levered FCF ($, Millions)

$14.99

$14.10

$14.80

$16.01

$17.93

Source

Analyst x1

Analyst x1

Analyst x1

Analyst x1

Est @ 11.96%

Present Value Discounted @ 9.05%

$13.74

$11.86

$11.41

$11.32

$11.63

Present Value of 5-year Cash Flow (PVCF)= US$60.0m

After calculating the present value of future cash flows in the intial 5-year period we need to calculate the Terminal Value, which accounts for all the future cash flows beyond the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of the GDP. In this case I have used the 10-year government bond rate (2.3%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 9%.

Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = US$17.9m × (1 + 2.3%) ÷ (9% – 2.3%) = US$273.6m

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = US$273.6m ÷ ( 1 + 9%)5 = US$177.4m

The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is US$237.4m. To get the intrinsic value per share, we divide this by the total number of shares outstanding, or the equivalent number if this is a depositary receipt or ADR. This results in an intrinsic value in the company’s reported currency of $16.7. However, PTS’s primary listing is in Canada, and 1 share of PTS in USD represents 1.314 ( USD/ CAD) share of TSX:PTS, so the intrinsic value per share in CAD is CA$21.94. Relative to the current share price of CA$18.76, the stock is about right, perhaps slightly undervalued at a 14.5% discount to what it is available for right now.

TSX:PTS Intrinsic Value Export September 12th 18
TSX:PTS Intrinsic Value Export September 12th 18

The assumptions

I’d like to point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you don’t agree with my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at Points International as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 9%, which is based on a levered beta of 0.875. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

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. For PTS, there are three fundamental aspects you should look at:

  1. Financial Health: Does PTS have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.

  2. Future Earnings: How does PTS’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: Are there other high quality stocks you could be holding instead of PTS? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. The Simply Wall St app conducts a discounted cash flow for every stock on the TSE every 6 hours. If you want to find the calculation for other stocks just search here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

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