Yahoo Finance Estimating The Fair Value Of Ackroo Inc. (CVE:AKR)
Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Ackroo Inc. (CVE:AKR) as an investment opportunity by projecting its future cash flows and then discounting them to today's value. I will use the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!
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 Ackroo
Crunching the numbers
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, we need to estimate the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last reported value. We assume companies with shrinking free cash flow are 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.
Generally we assume that a dollar today is more valuable than a dollar in the future, 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
2019 | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | |
Levered FCF (CA$, Millions) | CA$0.2 | CA$0.3 | CA$0.3 | CA$0.4 | CA$0.5 | CA$0.5 | CA$0.6 | CA$0.6 | CA$0.6 | CA$0.6 |
Growth Rate Estimate Source | Est @ 55.97% | Est @ 39.76% | Est @ 28.42% | Est @ 20.48% | Est @ 14.92% | Est @ 11.03% | Est @ 8.3% | Est @ 6.4% | Est @ 5.06% | Est @ 4.13% |
Present Value (CA$, Millions) Discounted @ 7.03% | CA$0.2 | CA$0.2 | CA$0.3 | CA$0.3 | CA$0.3 | CA$0.3 | CA$0.3 | CA$0.3 | CA$0.3 | CA$0.3 |
Present Value of 10-year Cash Flow (PVCF)= CA$3.01m
"Est" = FCF growth rate estimated by Simply Wall St
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 10-year government bond rate of 1.9%. We discount the terminal cash flows to today's value at a cost of equity of 7%.
Terminal Value (TV) = FCF2029 × (1 + g) ÷ (r – g) = CA$648k × (1 + 1.9%) ÷ (7% – 1.9%) = CA$13m
Present Value of Terminal Value (PVTV) = TV / (1 + r)10 = CA$CA$13m ÷ ( 1 + 7%)10 = CA$6.58m
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$9.59m. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value estimate of CA$0.13. Relative to the current share price of CA$0.13, the company appears about fair value at a 0.9% discount to what it is available for right now. DCFs are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.
Important 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 these inputs, I recommend redoing the calculations yourself and playing with them. 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 Ackroo 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 7%, which is based on a levered beta of 0.853. 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.
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. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For Ackroo, I've compiled three pertinent aspects you should further research:
Financial Health: Does AKR 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.
Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of AKR? 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 updates its DCF calculation for every CA stock every day, so if you want to find the intrinsic value of any other stock just search here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
