Kraken Robotics Inc.'s (CVE:PNG) Intrinsic Value Is Potentially 95% Above Its Share Price
Using the 2 Stage Free Cash Flow to Equity, Kraken Robotics fair value estimate is CA$1.02
Kraken Robotics is estimated to be 49% undervalued based on current share price of CA$0.52
Kraken Robotics' peers seem to be trading at a lower discount to fair value based onthe industry average of 45%
How far off is Kraken Robotics Inc. (CVE:PNG) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to their present value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
Check out our latest analysis for Kraken Robotics
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) estimate
Levered FCF (CA$, Millions)
Growth Rate Estimate Source
Est @ 57.26%
Est @ 40.61%
Est @ 28.96%
Est @ 20.80%
Est @ 15.09%
Est @ 11.09%
Est @ 8.29%
Est @ 6.33%
Est @ 4.96%
Present Value (CA$, Millions) Discounted @ 8.6%
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CA$78m
The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 1.8%. We discount the terminal cash flows to today's value at a cost of equity of 8.6%.
Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = CA$20m× (1 + 1.8%) ÷ (8.6%– 1.8%) = CA$301m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CA$301m÷ ( 1 + 8.6%)10= CA$132m
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is CA$209m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of CA$0.5, the company appears quite good value at a 49% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Kraken Robotics 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 8.6%, which is based on a levered beta of 1.151. 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 Kraken Robotics
Debt is well covered by .
Interest payments on debt are not well covered.
Shareholders have been diluted in the past year.
Expected to breakeven next year.
Trading below our estimate of fair value by more than 20%.
Significant insider buying over the past 3 months.
Debt is not well covered by operating cash flow.
Has less than 3 years of cash runway based on current free cash flow.
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. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. What is the reason for the share price sitting below the intrinsic value? For Kraken Robotics, there are three relevant items you should explore:
Risks: For example, we've discovered 3 warning signs for Kraken Robotics that you should be aware of before investing here.
Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for PNG's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
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