# A Look At The Fair Value Of Horizon North Logistics Inc. (TSE:HNL)

In this article I am going to calculate the intrinsic value of Horizon North Logistics Inc. (TSE:HNL) by estimating the company’s future cash flows and discounting them to their present value. I will use the Discounted Cash Flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model. If you are reading this and its not January 2019 then I highly recommend you check out the latest calculation for Horizon North Logistics by following the link below.

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### Step by step through the calculation

I’m using the 2-stage growth model, which simply means we take in account two stages of company’s growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have perpetual stable growth rate. To begin with we have to get estimates of the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount this to its value today and sum up the total to get the present value of these cash flows.

#### 5-year cash flow estimate

 2019 2020 2021 2022 2023 Levered FCF (CA\$, Millions) CA\$17.93 CA\$36.97 CA\$31.58 CA\$26.98 CA\$23.05 Source Analyst x3 Analyst x3 Est @ -14.56% Est @ -14.56% Est @ -14.56% Present Value Discounted @ 8.84% CA\$16.48 CA\$31.21 CA\$24.50 CA\$19.23 CA\$15.10

Present Value of 5-year Cash Flow (PVCF)= CA\$107m

The second stage is also known as Terminal Value, this is the business’s cash flow after 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 (1.9%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 8.8%.

Terminal Value (TV) = FCF2023 × (1 + g) ÷ (r – g) = CA\$23m × (1 + 1.9%) ÷ (8.8% – 1.9%) = CA\$341m

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = CA\$341m ÷ ( 1 + 8.8%)5 = CA\$223m

The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is CA\$330m. In the final step we divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) or ADR then we use the equivalent number. This results in an intrinsic value of CA\$2.01. Compared to the current share price of CA\$1.92, the stock is about right, perhaps slightly undervalued at a 4.4% discount to what it is available for right now.

### Important assumptions

I’d like to point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you don’t agree with my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at Horizon North Logistics 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 8.8%, which is based on a levered beta of 0.855. 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:

Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company. For HNL, I’ve compiled three fundamental factors you should further examine:

1. Financial Health: Does HNL have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
2. Future Earnings: How does HNL’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
3. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of HNL? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. The Simply Wall St app conducts a discounted cash flow for every stock on the TSE every 6 hours. If you want to find the calculation for other stocks just search here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com. 