Estimated fair value of WeCommerce Holdings Ltd. (CVE:WE)
Today we are going to walk through a way to estimate the intrinsic value of WeCommerce Holdings Ltd. (CVE:WE) by projecting its future cash flows and then discounting them to the present value. We will use the Discounted Cash Flow (DCF) model for this purpose. Patterns like these may seem beyond a layman’s comprehension, but they’re pretty easy to follow.
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. If you still have burning questions about this type of assessment, take a look at Simply Wall St.’s analysis template.
See our latest analysis for WeCommerce Holdings
The model
We use the 2-stage growth model, which simply means that we consider two stages of business growth. In the initial period, the company may have a higher growth rate, and the second stage is generally assumed to have a stable growth rate. To start, we need to estimate the cash flows for the next ten years. Since no analyst estimate of free cash flow is available, 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, 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) | CA$9.59m | C$11.1 million | 12.4 million Canadian dollars | 13.5 million Canadian dollars | 14.4 million Canadian dollars | C$15.1 million | 15.7 million Canadian dollars | 16.2 million Canadian dollars | 16.7 million Canadian dollars | C$17.1 million |
Growth rate estimate Source | Is at 22.25% | Is at 16.04% | Is at 11.7% | Is at 8.66% | Is at 6.53% | Is at 5.04% | Is 3.99% | Is at 3.26% | Is at 2.75% | Is at 2.39% |
Present value (CA$, millions) discounted at 6.2% | CA$9.0 | CA$9.9 | CA$10.4 | CA$10.6 | CA$10.7 | CA$10.6 | CA$10.3 | CA$10.1 | CA$9.7 | CA$9.4 |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = 100 million Canadian dollars
We now need to calculate the terminal value, which represents all future cash flows after this ten-year period. 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 6.2%.
Terminal value (TV)= FCF_{2031} × (1 + g) ÷ (r – g) = C$17 million × (1 + 1.6%) ÷ (6.2%–1.6%) = C$376 million
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= C$376m÷ (1 + 6.2%)^{ten}= 206 million Canadian dollars
The total value, or equity value, is then the sum of the present value of future cash flows, which in this case is C$306 million. The final step is to divide the equity value by the number of shares outstanding. Compared to the current share price of C$7.5, the company appears around fair value at the time of writing. Remember though that this is only a rough estimate, and like any complex formula – trash in, trash out.
The hypotheses
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 consider WeCommerce Holdings 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 6.2%, which is based on a leveraged beta of 1.088. 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.
Let’s move on :
Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won’t be the only piece of analysis you look at for a company. The DCF model is not a perfect stock valuation tool. 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 WeCommerce Holdings, there are three relevant things you should dig into:
- Risks: For example, we discovered 3 warning signs for WeCommerce Holdings which you should be aware of before investing here.
- Future earnings: How does WE’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.