An Intrinsic Calculation For Thor Explorations Ltd. (CVE:THX) Suggests It's 48% Undervalued
Key Insights
The projected fair value for Thor Explorations is CA$0.57 based on 2 Stage Free Cash Flow to Equity
Thor Explorations' CA$0.30 share price signals that it might be 48% undervalued
Analyst price target for THX is US$0.63, which is 9.1% above our fair value estimate
In this article we are going to estimate the intrinsic value of Thor Explorations Ltd. (CVE:THX) by taking the expected future cash flows and discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
See our latest analysis for Thor Explorations
The Method
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) estimate
2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | |
Levered FCF ($, Millions) | US$93.2m | US$116.6m | US$40.9m | US$15.8m | US$9.09m | US$6.44m | US$5.16m | US$4.47m | US$4.08m | US$3.85m |
Growth Rate Estimate Source | Analyst x2 | Analyst x2 | Analyst x1 | Est @ -61.40% | Est @ -42.42% | Est @ -29.14% | Est @ -19.84% | Est @ -13.33% | Est @ -8.77% | Est @ -5.58% |
Present Value ($, Millions) Discounted @ 8.2% | US$86.1 | US$99.6 | US$32.3 | US$11.5 | US$6.1 | US$4.0 | US$3.0 | US$2.4 | US$2.0 | US$1.8 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$249m
After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. 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 8.2%.
Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$3.9m× (1 + 1.9%) ÷ (8.2%– 1.9%) = US$62m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$62m÷ ( 1 + 8.2%)10= US$28m
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$277m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of CA$0.3, the company appears quite undervalued at a 48% 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.
The 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. 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 Thor Explorations 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 8.2%, which is based on a levered beta of 1.270. 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 Thor Explorations
Strength
Earnings growth over the past year exceeded the industry.
Debt is not viewed as a risk.
Weakness
Shareholders have been diluted in the past year.
Opportunity
Annual earnings are forecast to grow faster than the Canadian market.
Good value based on P/E ratio and estimated fair value.
Significant insider buying over the past 3 months.
Threat
Annual revenue is expected to decline over the next 3 years.
Moving On:
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. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Can we work out why the company is trading at a discount to intrinsic value? For Thor Explorations, we've compiled three relevant elements you should look at:
Risks: Every company has them, and we've spotted 1 warning sign for Thor Explorations you should know about.
Future Earnings: How does THX'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 TSXV 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.
