Yahoo Finance Calculating The Fair Value Of NFI Group Inc (TSE:NFI)
Does the share price for NFI Group Inc (TSE:NFI) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value by projecting its future cash flows and then discounting them to today’s 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. Please also note that this article was written in June 2018 so be sure check out the updated calculation by following the link below. View out our latest analysis for NFI Group
Crunching the numbers
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 estimate
2018 | 2019 | 2020 | 2021 | 2022 | |
Levered FCF ($, Millions) | $177.84 | $232.94 | $253.50 | $312.00 | $324.00 |
Source | Analyst x7 | Analyst x7 | Analyst x2 | Analyst x1 | Analyst x1 |
Present Value Discounted @ 12.13% | $158.61 | $185.28 | $179.83 | $197.40 | $182.82 |
Present Value of 5-year Cash Flow (PVCF)= CA$903.94m
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 an annual growth rate equal to the 10-year government bond rate of 2.3%. We discount this to today’s value at a cost of equity of 12.1%.
Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = CA$324.00m × (1 + 2.3%) ÷ (12.1% – 2.3%) = CA$3.39b
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = CA$3.39b ÷ ( 1 + 12.1%)5 = CA$1.91b
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$2.82b. 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 in the company’s reported currency of $44.69. However, NFI’s primary listing is in Canada, and 1 share of NFI in USD represents 1.33 ( USD/ CAD) share of TSX:NFI, so the intrinsic value per share in CAD is CA$59.45. Compared to the current share price of CA$49.34, the stock is about right, perhaps slightly undervalued at a 17.01% discount to what it is available for right now.
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 NFI Group 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 12.1%, which is based on a levered beta of 1.277. 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. For NFI, I’ve put together three pertinent aspects you should look at:
Financial Health: Does NFI 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 NFI’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 NFI? 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 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.
