Keyera Corp (TSX:KEY) Is Trading At A 31.36% Discount To Its Intrinsic Value

In this article I am going to calculate the intrinsic value of Keyera Corp (TSX:KEY) by taking the expected future cash flows and discounting them to today’s value. This is done using the Discounted Cash Flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. If you are reading this and its not November 2017 then I highly recommend you check out the latest calculation for Keyera by following the link below. See our latest analysis for KEY

Crunching the numbers

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second ‘steady growth’ period. 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 forecast

2017 2018 2019 2020 2021
Levered FCF (CAD, Millions) CA$-218.00 CA$315.35 CA$565.05 CA$755.60 CA$767.40
Source Analyst x4 Analyst x2 Analyst x2 Analyst x2 Analyst x1
Present Value Discounted @ 8.56% CA$-200.81 CA$267.57 CA$441.61 CA$543.96 CA$508.88

Present Value of 5-year Cash Flow (PVCF)= CA$1,561

After calculating the present value of future cash flows in the intial 5-year period we need to calculate the Terminal Value, which accounts for all the future cash flows beyond the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of the GDP. In this case I have used the 10-year government bond rate (2.5%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 8.6%.

Terminal Value (TV) = FCF2021 × (1 + g) ÷ (r – g) = CA$767 × (1 + 2.5%) ÷ (8.6% – 2.5%) = CA$12,906

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = CA$12,906 / ( 1 + 8.6%)5 = CA$8,558

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is CA$10,120. To get the intrinsic value per share, we divide this by the total number of shares outstanding, or the equivalent number if this is a depositary receipt or ADR. This results in an intrinsic value of CA$53.47, which, compared to the current share price of CA$36.7, we find that Keyera is quite good value at a 31.36% discount to what it is available for right now.

TSX:KEY Intrinsic Value Nov 15th 17
TSX:KEY Intrinsic Value Nov 15th 17

The assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. You don’t have to agree with my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Keyera 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 8.6%, which is based on a levered beta of 0.809. 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:

Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For KEY, I’ve put together three fundamental aspects you should further examine:

PS. Simply Wall St does a DCF calculation for every CA stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.