High Liner Foods Incorporated's (TSE:HLF) Intrinsic Value Is Potentially 26% Below Its Share Price
Key Insights
Using the 2 Stage Free Cash Flow to Equity, High Liner Foods fair value estimate is CA$9.32
Current share price of CA$12.57 suggests High Liner Foods is potentially 35% overvalued
Our fair value estimate is 39% lower than High Liner Foods' analyst price target of US$15.40
Today we'll do a simple run through of a valuation method used to estimate the attractiveness of High Liner Foods Incorporated (TSE:HLF) as an investment opportunity by taking the expected future cash flows and discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. There's really not all that much to it, even though it might appear quite complex.
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
View our latest analysis for High Liner Foods
Is High Liner Foods Fairly Valued?
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) forecast
2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | |
Levered FCF ($, Millions) | US$36.9m | US$41.7m | US$20.4m | US$13.3m | US$10.1m | US$8.46m | US$7.55m | US$7.03m | US$6.73m | US$6.57m |
Growth Rate Estimate Source | Analyst x2 | Analyst x2 | Est @ -50.95% | Est @ -35.07% | Est @ -23.95% | Est @ -16.17% | Est @ -10.72% | Est @ -6.91% | Est @ -4.24% | Est @ -2.37% |
Present Value ($, Millions) Discounted @ 5.9% | US$34.9 | US$37.2 | US$17.2 | US$10.5 | US$7.6 | US$6.0 | US$5.1 | US$4.4 | US$4.0 | US$3.7 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$131m
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 (2.0%) 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 5.9%.
Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$6.6m× (1 + 2.0%) ÷ (5.9%– 2.0%) = US$171m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$171m÷ ( 1 + 5.9%)10= US$96m
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$227m. 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$12.6, the company appears potentially overvalued at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.
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. 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 High Liner Foods 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 0.852. 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 High Liner Foods
Strength
Debt is well covered by cash flow.
Dividends are covered by earnings and cash flows.
Weakness
Earnings declined over the past year.
Interest payments on debt are not well covered.
Dividend is low compared to the top 25% of dividend payers in the Food market.
Current share price is above our estimate of fair value.
Opportunity
HLF's financial characteristics indicate limited near-term opportunities for shareholders.
Threat
Annual revenue is forecast to grow slower than the Canadian market.
Moving On:
Whilst important, the DCF calculation is only one of many factors that you need to assess 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. Can we work out why the company is trading at a premium to intrinsic value? For High Liner Foods, we've compiled three pertinent aspects you should consider:
Risks: We feel that you should assess the 3 warning signs for High Liner Foods (1 is concerning!) we've flagged before making an investment in the company.
Future Earnings: How does HLF'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. 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.
