Yahoo Finance Is B2Gold Corp (TSE:BTO) Expensive For A Reason? A Look At The Intrinsic Value
Today I will be providing a simple run through of a valuation method used to estimate the attractiveness of B2Gold Corp (TSE:BTO) as an investment opportunity 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! If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model. If you are reading this and its not October 2018 then I highly recommend you check out the latest calculation for B2Gold by following the link below.
See our latest analysis for B2Gold
Step by step through the calculation
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. I then discount this to its value today and sum up the total to get the present value of these cash flows.
5-year cash flow estimate
2019 | 2020 | 2021 | 2022 | 2023 | |
Levered FCF ($, Millions) | $416.69 | $363.90 | $318.36 | $255.39 | $285.80 |
Source | Analyst x11 | Analyst x9 | Analyst x3 | Analyst x1 | Est @ 11.91% |
Present Value Discounted @ 17.66% | $354.14 | $262.86 | $195.45 | $133.26 | $126.74 |
Present Value of 5-year Cash Flow (PVCF)= US$1.1b
The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage. 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) = US$286m × (1 + 2.3%) ÷ (17.7% – 2.3%) = US$1.9b
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = US$1.9b ÷ ( 1 + 17.7%)5 = US$847m
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$1.9b. In the final step we 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) or ADR then we use the equivalent number. This results in an intrinsic value in the company’s reported currency of $1.94. However, BTO’s primary listing is in Canada, and 1 share of BTO in USD represents 1.281 ( USD/ CAD) share of TSX:BTO, so the intrinsic value per share in CAD is CA$2.49. Relative to the current share price of CA$3.09, the stock is fair value, maybe slightly overvalued and not available at a discount at this time.
The assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don’t have to agree with my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at B2Gold 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:
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 BTO, I’ve compiled three important factors you should further examine:
Financial Health: Does BTO 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.
Future Earnings: How does BTO’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: Are there other high quality stocks you could be holding instead of BTO? 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.
