How far is BioNeutra Global Corporation (CVE:BGA) from its intrinsic value? Using the most recent financial data, we will examine whether the stock price is fair by estimating the company’s future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model for this purpose. This may sound complicated, but it’s actually quite simple!
We generally believe that the value of a company is the present value of all the cash it will generate in the future. However, a DCF is just one of many evaluation metrics, and it is not without its flaws. For those who are passionate about stock analysis, the Simply Wall St analysis template here may interest you.
Check out our latest analysis for BioNeutra Global
What is the estimated value?
We will use a two-stage DCF model which, as the name suggests, takes into account two stages of growth. The first stage is usually a period of higher growth which stabilizes towards the terminal value, captured in the second period of “sustained growth”. To start, we need to estimate the cash flows for the next ten years. Since no analyst estimates of free cash flow are available to us, we have extrapolated the previous free cash flow (FCF) from the company’s latest reported value. We assume that companies with decreasing free cash flow will slow their rate of contraction and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow more in early years than in later years.
A DCF is based on the idea that a dollar in the future is worth less than a dollar today, so we need to discount the sum of these future cash flows to arrive at an estimate of present value:
Estimated free cash flow (FCF) over 10 years
|Leveraged FCF (CA$, Millions)||CA$397,600||CA$286,300||CA$231,500||CA$201,700||CA$184.5k||CA$174,400||CA$168.5k||CA$165.4k||CA$164,000||CA$163,900|
|Growth rate estimate Source||Is @ -40.71%||Is @ -28.01%||Is @ -19.12%||East @ -12.89%||Is @ -8.54%||East @ -5.49%||Is @ -3.35%||Is @ -1.86%||Is @ -0.81%||East @ -0.08%|
|Present value (CA$, millions) discounted at 7.0%||$0.4 CAD||CA$0.3||CA$0.2||CA$0.2||CA$0.1||CA$0.1||CA$0.1||CA$0.1||CA$0.09||CA$0.08|
(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = C$1.0m
After calculating the present value of future cash flows over the initial 10-year period, we need to calculate the terminal value, which takes into account all future cash flows beyond the first stage. For a number of reasons, a very conservative growth rate is used which cannot exceed that of a country’s GDP growth. In this case, we used the 5-year average of the 10-year government bond yield (1.6%) to estimate future growth. Similar to the 10-year “growth” period, we discount future cash flows to present value, using a cost of equity of 7.0%.
Terminal value (TV)= FCF2032 × (1 + g) ÷ (r – g) = CA$164,000 × (1 + 1.6%) ÷ (7.0%–1.6%) = CA$3.1 million
Present value of terminal value (PVTV)= TV / (1 + r)ten= C$3.1m÷ (1 + 7.0%)ten= 1.6 million Canadian dollars
The total value is the sum of the cash flows for the next ten years plus the present terminal value, which gives the total equity value, which in this case is C$2.6 million. In the last step, we divide the equity value by the number of shares outstanding. Compared to the current share price of C$0.06, the company appears to be about fair value at a 0.9% discount to the current share price. Remember though that this is only a rough estimate, and like any complex formula – trash in, trash out.
The above calculation is highly dependent on two assumptions. One is the discount rate and the other is the cash flows. You don’t have to agree with these entries, I recommend that you redo the calculations yourself and play around with them. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we view BioNeutra Global 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 factors in debt. In this calculation, we used 7.0%, which is based on a leveraged beta of 1.266. Beta is a measure of a stock’s volatility relative to the market as a whole. We derive our beta from the average industry beta of broadly comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
Valuation is only one side of the coin in terms of crafting your investment thesis, and it shouldn’t be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under/overvalued?” For example, changes in the company’s cost of equity or the risk-free rate can have a significant impact on the valuation. For BioNeutra Global, there are three important factors that you should consider in more detail:
- Risks: Take risks, for example – BioNeutra Global has 4 warning signs we think you should know.
- Other high-quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality actions to get an idea of what you might be missing!
- Other environmentally friendly businesses: Are you concerned about the environment and do you think that consumers will buy more and more environmentally friendly products? Browse our interactive list of companies thinking about a greener future to discover actions you might not have thought of!
PS. The Simply Wall St app performs a discounted cash flow valuation for each stock on the TSXV every day. If you want to find the calculation for other stocks, search here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
Calculation of discounted cash flows for each share
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