Stock Analysis

Estimating The Fair Value Of Targeted Microwave Solutions Inc. (CVE:TMS.H)

TSXV:TMS.H
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Key Insights

  • The projected fair value for Targeted Microwave Solutions is CA$0.0047 based on 2 Stage Free Cash Flow to Equity
  • With CA$0.005 share price, Targeted Microwave Solutions appears to be trading close to its estimated fair value
  • Peers of Targeted Microwave Solutions are currently trading on average at a 23% discount

Does the April share price for Targeted Microwave Solutions Inc. (CVE:TMS.H) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by projecting its future cash flows and then discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

See our latest analysis for Targeted Microwave Solutions

What's The Estimated Valuation?

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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, 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 ($, Millions) US$4.4k US$7.7k US$11.7k US$15.9k US$20.1k US$24.0k US$27.3k US$30.1k US$32.5k US$34.5k
Growth Rate Estimate Source Est @ 103.49% Est @ 73.04% Est @ 51.73% Est @ 36.81% Est @ 26.36% Est @ 19.05% Est @ 13.93% Est @ 10.35% Est @ 7.84% Est @ 6.09%
Present Value ($, Millions) Discounted @ 7.5% US$0.004 US$0.007 US$0.009 US$0.01 US$0.01 US$0.02 US$0.02 US$0.02 US$0.02 US$0.02

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$129k

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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 7.5%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$34k× (1 + 2.0%) ÷ (7.5%– 2.0%) = US$644k

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$644k÷ ( 1 + 7.5%)10= US$314k

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$443k. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of CA$0.005, the company appears around fair value at the time of writing. 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.

dcf
TSXV:TMS.H Discounted Cash Flow April 4th 2024

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. 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 Targeted Microwave Solutions 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 7.5%, which is based on a levered beta of 1.188. 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.

SWOT Analysis for Targeted Microwave Solutions

Strength
  • No major strengths identified for TMS.H.
Weakness
  • Current share price is above our estimate of fair value.
Opportunity
  • Has sufficient cash runway for more than 3 years based on current free cash flows.
  • Lack of analyst coverage makes it difficult to determine TMS.H's earnings prospects.
Threat
  • Debt is not well covered by operating cash flow.
  • Total liabilities exceed total assets, which raises the risk of financial distress.

Looking Ahead:

Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for 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 need to 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 significantly impact the valuation. For Targeted Microwave Solutions, we've compiled three essential aspects you should further research:

  1. Risks: For instance, we've identified 4 warning signs for Targeted Microwave Solutions that you should be aware of.
  2. Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
  3. Other Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!

PS. Simply Wall St updates its DCF calculation for every Canadian stock every day, so if you want to find the intrinsic value of any other stock just search here.

Valuation is complex, but we're here to simplify it.

Discover if Targeted Microwave Solutions might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.

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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.