Key Insights
- The projected fair value for Fintech Select is CA$0.033 based on 2 Stage Free Cash Flow to Equity
- With CA$0.035 share price, Fintech Select appears to be trading close to its estimated fair value
- When compared to theindustry average discount of -23%, Fintech Select's competitors seem to be trading at a greater premium to fair value
Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Fintech Select Ltd. (CVE:FTEC) as an investment opportunity by taking the expected future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.
View our latest analysis for Fintech Select
Is Fintech Select Fairly Valued?
We're 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 a stable growth rate. In the first stage we need to estimate the cash flows to the business over the next ten years. 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, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) estimate
| 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | |
| Levered FCF (CA$, Millions) | CA$123.5k | CA$123.5k | CA$124.1k | CA$125.3k | CA$126.8k | CA$128.6k | CA$130.5k | CA$132.7k | CA$134.9k | CA$137.3k |
| Growth Rate Estimate Source | Est @ -0.85% | Est @ -0.04% | Est @ 0.53% | Est @ 0.93% | Est @ 1.21% | Est @ 1.40% | Est @ 1.54% | Est @ 1.64% | Est @ 1.70% | Est @ 1.75% |
| Present Value (CA$, Millions) Discounted @ 6.3% | CA$0.1 | CA$0.1 | CA$0.1 | CA$0.1 | CA$0.09 | CA$0.09 | CA$0.09 | CA$0.08 | CA$0.08 | CA$0.07 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CA$929k
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 a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (1.9%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 6.3%.
Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = CA$137k× (1 + 1.9%) ÷ (6.3%– 1.9%) = CA$3.2m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CA$3.2m÷ ( 1 + 6.3%)10= CA$1.7m
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 CA$2.6m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of CA$0.04, 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.
The Assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 Fintech Select 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 6.3%, which is based on a levered beta of 0.885. 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 Fintech Select
- Debt is well covered by earnings and cashflows.
- Current share price is above our estimate of fair value.
- Has sufficient cash runway for more than 3 years based on current free cash flows.
- Lack of analyst coverage makes it difficult to determine FTEC's earnings prospects.
- Total liabilities exceed total assets, which raises the risk of financial distress.
Looking Ahead:
Although the valuation of a company is important, 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?" If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For Fintech Select, there are three relevant aspects you should further research:
- Risks: We feel that you should assess the 4 warning signs for Fintech Select (3 are a bit concerning!) we've flagged before making an investment in the company.
- 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!
- 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.
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Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
About TSXV:FTEC
Moderate and good value.
