A Look At The Intrinsic Value Of Fibre-Crown Manufacturing Inc. (CVE:FBR.H)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Fibre-Crown Manufacturing fair value estimate is CA$0.062
• With CA$0.06 share price, Fibre-Crown Manufacturing appears to be trading close to its estimated fair value
• Peers of Fibre-Crown Manufacturing are currently trading on average at a 17% premium

Does the February share price for Fibre-Crown Manufacturing Inc. (CVE:FBR.H) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the expected future cash flows and discounting them to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

See our latest analysis for Fibre-Crown Manufacturing

Step By Step Through The Calculation

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 begin with, we have to get estimates of 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 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 need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) forecast

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (CA$, Millions)	CA$13.6k	CA$16.4k	CA$19.0k	CA$21.1k	CA$22.9k	CA$24.5k	CA$25.7k	CA$26.8k	CA$27.8k	CA$28.6k
Growth Rate Estimate Source	Est @ 29.36%	Est @ 21.15%	Est @ 15.40%	Est @ 11.38%	Est @ 8.56%	Est @ 6.59%	Est @ 5.21%	Est @ 4.24%	Est @ 3.57%	Est @ 3.09%
Present Value (CA$, Millions) Discounted @ 7.1%	CA$0.01	CA$0.01	CA$0.02	CA$0.02	CA$0.02	CA$0.02	CA$0.02	CA$0.02	CA$0.02	CA$0.01

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CA$152k

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 5-year average of the 10-year government bond yield of 2.0%. We discount the terminal cash flows to today's value at a cost of equity of 7.1%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = CA$29k× (1 + 2.0%) ÷ (7.1%– 2.0%) = CA$575k

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CA$575k÷ ( 1 + 7.1%)¹⁰= CA$290k

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$442k. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of CA$0.06, the company appears about fair value at a 3.6% discount to where the stock price trades currently. Valuations 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

We would point out that 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 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 Fibre-Crown Manufacturing 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 7.1%, which is based on a levered beta of 1.104. 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.

Moving On:

Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. It's not possible to obtain a foolproof valuation with a DCF model. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Fibre-Crown Manufacturing, we've put together three essential factors you should look at:

1. Risks: For example, we've discovered 4 warning signs for Fibre-Crown Manufacturing that you should be aware of before investing here.
2. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
3. Other Top Analyst Picks: Interested to see what the analysts are thinking? Take a look at our interactive list of analysts' top stock picks to find out what they feel might have an attractive future outlook!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the TSXV every day. If you want to find the calculation for other stocks just search here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.