U.S. Markets closed

Investors Are Undervaluing TMAC Resources Inc (TSE:TMR) By 32.01%

Matthew Smith

I am going to run you through how I calculated the intrinsic value of TMAC Resources Inc (TSE:TMR) by taking the expected future cash flows and discounting them to their present value. I will be using the discounted cash flows (DCF) model. It may sound complicated, but actually it is quite simple! Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Please also note that this article was written in August 2018 so be sure check out the updated calculation by following the link below.

Check out our latest analysis for TMAC Resources

What’s the value?

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 start off with we need to estimate the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. The sum of these cash flows is then discounted to today’s value.

5-year cash flow forecast

2018 2019 2020 2021 2022
Levered FCF (CA$, Millions) CA$20.44 CA$115.47 CA$128.27 CA$150.07 CA$174.08
Source Analyst x3 Analyst x4 Analyst x3 Est @ 17%, capped from 246.71% Est @ 16%, capped from 246.71%
Present Value Discounted @ 17.66% CA$17.37 CA$83.41 CA$78.75 CA$78.30 CA$77.20

Present Value of 5-year Cash Flow (PVCF)= CA$335.03m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after the five years. 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 17.7%.

Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = CA$174.08m × (1 + 2.3%) ÷ (17.7% – 2.3%) = CA$1.16b

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = CA$1.16b ÷ ( 1 + 17.7%)5 = CA$515.71m

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 CA$850.74m. The last step is to then divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) then we use the equivalent number. This results in an intrinsic value of CA$9.25. Relative to the current share price of CA$6.29, the stock is quite good value at a 32.01% discount to what it is available for right now.

TSX:TMR Intrinsic Value Export August 14th 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 TMAC Resources 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 17.7%, which is based on a levered beta of 2. 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:

Whilst important, DCF calculation 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 TMR, there are three important aspects you should further research:

  1. Financial Health: Does TMR 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 TMR’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 TMR? 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.