An Intrinsic Value Calculation For Mountain Province Diamonds Inc (TSE:MPVD) Shows It’s 40.07% Undervalued
How far off is Mountain Province Diamonds Inc (TSX:MPVD) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced using the discounted cash flows (DCF) model. If you want to learn more about this method, the basis for my calculations can be found in detail in the Simply Wall St analysis model. If you are reading this after January 2018 then I highly recommend you check out the latest calculation for Mountain Province Diamonds here.
Crunching the numbers
I’ve used the 2-stage growth model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the initial phase has higher growth rates that plateau over time. To begin, I use the analyst consensus forecast of MPVD’s levered free cash flow (FCF) over the next five years and discounted these figures at the rate of 17.87%. When estimates weren’t available, I’ve extrapolated the average annual growth rate over the previous five years, capped at a reasonable level. This resulted in a present value of 5-year cash flow of CA$409.5M. Want to know how I calculated this value? Check out our detailed analysis here.
The graph above shows how MPVD’s top and bottom lines are expected to move going forward, which should give you some color on MPVD’s outlook. Now we need to calculate the terminal value, which is the business’s cash flow after the first stage. I’ve decided to use the 10-year government bond rate of 2.8% as the steady growth rate, which is rightly below GDP growth, but more towards the conservative side. The present value of the terminal value after discounting it back five years is CA$526.4M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is CA$935.9M. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of CA$5.84, which, compared to the current share price of CA$3.5, we find that Mountain Province Diamonds is quite undervalued at a 40.07% discount to what it is available for right now.
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. What is the reason for the share price to differ from the intrinsic value? For MPVD, I’ve put together three essential factors you should further examine:
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the TSX every 6 hours. If you want to find the calculation for other stocks just search here.
To help readers see pass 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.
