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# Silvercorp Metals Inc (TSE:SVM) Investors Are Paying Above The Intrinsic Value

How far off is Silvercorp Metals Inc (TSE:SVM) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced by projecting its future cash flows and then discounting them to todayâ€™s 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 October 2018 so be sure check out the updated calculation by following the link below.

### Whatâ€™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 companyâ€™s cash flows. Generally the first stage is higher growth, and the second stage is a more stable growth phase. In the first stage we need to estimate the cash flows to the business over the next five years. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount the sum of these cash flows to arrive at a present value estimate.

#### 5-year cash flow estimate

 2019 2020 2021 2022 2023 Levered FCF (\$, Millions) \$38.35 \$37.00 \$39.18 \$41.48 \$43.92 Source Analyst x2 Analyst x1 Est @ 5.88% Est @ 5.88% Est @ 5.88% Present Value Discounted @ 16.02% \$33.06 \$27.49 \$25.09 \$22.90 \$20.90

Present Value of 5-year Cash Flow (PVCF)= US\$129m

After calculating the present value of future cash flows in the intial 5-year period we need to calculate the Terminal Value, which accounts for all the future cash flows beyond the first stage. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 2.3%. We discount this to todayâ€™s value at a cost of equity of 16%.

Terminal Value (TV) = FCF2022 Ã— (1 + g) Ã· (r â€“ g) = US\$44m Ã— (1 + 2.3%) Ã· (16% â€“ 2.3%) = US\$329m

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = US\$329m Ã· ( 1 + 16%)5 = US\$156m

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US\$286m. To get the intrinsic value per share, we divide this by the total number of shares outstanding, or the equivalent number if this is a depositary receipt or ADR. This results in an intrinsic value in the companyâ€™s reported currency of \$1.7. However, SVMâ€™s primary listing is in Canada, and 1 share of SVM in USD represents 1.303 ( USD/ CAD) share of TSX:SVM, so the intrinsic value per share in CAD is CA\$2.21. Compared to the current share price of CA\$2.97, the stock is quite expensive and not available at a discount at this time.

### The assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. If you donâ€™t agree with my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at Silvercorp Metals 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 Iâ€™ve used 16%, which is based on a levered beta of 1.786. 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:

Although the valuation of a company is important, it shouldnâ€™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 SVM, Iâ€™ve put together three important factors you should look at:

1. Financial Health: Does SVM 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 SVMâ€™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 SVM? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St does a DCF calculation for every CA stock every 6 hours, so if you want to find the intrinsic value of any other stock 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.