Calculating The Intrinsic Value Of Pioneering Technology Corp. (CVE:PTE)

Key Insights

• Pioneering Technology's estimated fair value is CA$0.013 based on 2 Stage Free Cash Flow to Equity
• With CA$0.015 share price, Pioneering Technology appears to be trading close to its estimated fair value
• When compared to theindustry average discount of -7.4%, Pioneering Technology's competitors seem to be trading at a lesser premium to fair value

How far off is Pioneering Technology Corp. (CVE:PTE) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced 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. There's really not all that much to it, even though it might appear quite complex.

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 still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

View our latest analysis for Pioneering Technology

The Model

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, we need to estimate 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 discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (CA$, Millions)	CA$31.1k	CA$42.7k	CA$54.0k	CA$64.4k	CA$73.4k	CA$81.0k	CA$87.4k	CA$92.7k	CA$97.1k	CA$101.0k
Growth Rate Estimate Source	Est @ 52.19%	Est @ 37.11%	Est @ 26.56%	Est @ 19.17%	Est @ 14.00%	Est @ 10.38%	Est @ 7.84%	Est @ 6.07%	Est @ 4.83%	Est @ 3.96%
Present Value (CA$, Millions) Discounted @ 12%	CA$0.03	CA$0.03	CA$0.04	CA$0.04	CA$0.04	CA$0.04	CA$0.04	CA$0.04	CA$0.04	CA$0.03

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CA$370k

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 12%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = CA$101k× (1 + 1.9%) ÷ (12%– 1.9%) = CA$1.0m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CA$1.0m÷ ( 1 + 12%)¹⁰= CA$333k

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$703k. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of CA$0.01, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

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 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 Pioneering Technology 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 12%, which is based on a levered beta of 2.000. 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 Pioneering Technology

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. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Pioneering Technology, we've compiled three important factors you should consider:

1. Risks: For instance, we've identified 2 warning signs for Pioneering Technology (1 is a bit concerning) 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. 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.