An intrinsic calculation for Thunderbird Entertainment Group Inc. (CVE:TBRD) suggests it is undervalued by 27%
Does Thunderbird Entertainment Group Inc.’s (CVE:TBRD) May Share Price Reflect What It’s Really Worth? Today we are going to estimate the intrinsic value of the stock by taking the expected future cash flows and discounting them to their present value. This will be done using the discounted cash flow (DCF) model. Before you think you can’t figure it out, just read on! It’s actually a lot less complex than you might imagine.
We draw your attention to the fact that there are many ways to value a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. Anyone interested in learning a little more about intrinsic value should read the Simply Wall St.
Check out our latest review for Thunderbird Entertainment Group
The model
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 begin with, we need to obtain cash flow estimates for the next ten years. Wherever possible, we use analysts’ estimates, but where these are not available, we extrapolate the previous free cash flow (FCF) from the latest estimate or 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, and so the sum of these future cash flows is then discounted to today’s value:
10-Year Free Cash Flow (FCF) Forecast
2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | |
Leveraged FCF (CA$, Millions) | 11.8 million Canadian dollars | 13.1 million Canadian dollars | 12.8 million Canadian dollars | 12.6 million Canadian dollars | 12.6 million Canadian dollars | 12.6 million Canadian dollars | 12.7 million Canadian dollars | 12.8 million Canadian dollars | 12.9 million Canadian dollars | 13.1 million Canadian dollars |
Growth rate estimate Source | Analyst x1 | Analyst x1 | Is @ -2.4% | Is @ -1.21% | Is @ -0.38% | Is at 0.2% | Is at 0.61% | Is at 0.89% | Is at 1.09% | Is at 1.23% |
Present value (CA$, millions) discounted at 6.3% | CA$11.1 | CA$11.6 | CA$10.6 | CA$9.9 | CA$9.3 | CA$8.7 | CA$8.3 | CA$7.8 | CA$7.5 | CA$7.1 |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = 91 million Canadian dollars
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. The Gordon Growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average 10-year government bond yield of 1.6%. We discount terminal cash flows to present value at a cost of equity of 6.3%.
Terminal value (TV)= FCF_{2031} × (1 + g) ÷ (r – g) = C$13 million × (1 + 1.6%) ÷ (6.3%–1.6%) = C$281 million
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= C$281m÷ (1 + 6.3%)^{ten}= 152 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$243 million. In the last step, we divide the equity value by the number of shares outstanding. Compared to the current share price of C$3.6, the company looks slightly undervalued at a 27% discount to the current share price. Ratings are imprecise instruments, however, much like a telescope – move a few degrees and end up in another galaxy. Keep that in mind.
The hypotheses
Now, the most important inputs to a discounted cash flow are the discount rate and, of course, the actual cash flows. Part of investing is coming up with your own assessment of a company’s future performance, so try the math yourself and check your own assumptions. 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 Thunderbird Entertainment Group 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 6.3%, which is based on a leveraged beta of 1.116. 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.
Next steps:
Although important, the DCF calculation is just one of many factors you need to assess for a business. It is not possible to obtain an infallible valuation with a DCF model. Preferably, you would apply different cases and assumptions and see their impact on the valuation of the business. If a company grows at a different rate, or if its cost of equity or risk-free rate changes sharply, output may be very different. Why is the stock price below intrinsic value? For Thunderbird Entertainment Group, we have compiled three relevant aspects that you should dig deeper into:
- Risks: For example, we have identified 1 warning sign for Thunderbird Entertainment Group of which you should be aware.
- Future earnings: How does TBRD’s growth rate compare to its peers and the market in general? Dive deeper into the analyst consensus figure for the coming years by interacting with our free analyst growth forecast chart.
- 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!
PS. The Simply Wall St app performs a discounted cash flow valuation daily for each stock on the TSXV. 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.