Estimating The Fair Value Of Tidewater Renewables Ltd. (TSE:LCFS)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Tidewater Renewables fair value estimate is CA$2.25
• Tidewater Renewables' CA$2.65 share price indicates it is trading at similar levels as its fair value estimate
• Peers of Tidewater Renewables are currently trading on average at a 46% discount

Does the May share price for Tidewater Renewables Ltd. (TSE:LCFS) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the forecast future cash flows of the company and discounting them back to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. It may sound complicated, but actually it is quite simple!

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. 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.

Our free stock report includes 2 warning signs investors should be aware of before investing in Tidewater Renewables. Read for free now.

The Method

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. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or 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 discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (CA$, Millions)	-CA$9.95m	CA$25.5m	CA$14.0m	CA$8.85m	CA$6.63m	CA$5.51m	CA$4.90m	CA$4.56m	CA$4.36m	CA$4.27m
Growth Rate Estimate Source	Analyst x2	Analyst x2	Analyst x1	Est @ -36.81%	Est @ -25.06%	Est @ -16.83%	Est @ -11.08%	Est @ -7.05%	Est @ -4.22%	Est @ -2.25%
Present Value (CA$, Millions) Discounted @ 8.1%	-CA$9.2	CA$21.8	CA$11.1	CA$6.5	CA$4.5	CA$3.4	CA$2.8	CA$2.4	CA$2.2	CA$2.0

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CA$47m

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 (2.4%) 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 8.1%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = CA$4.3m× (1 + 2.4%) ÷ (8.1%– 2.4%) = CA$76m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CA$76m÷ ( 1 + 8.1%)¹⁰= CA$35m

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$82m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of CA$2.7, the company appears around fair value at the time of writing. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

The 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. 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 Tidewater Renewables 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 8.1%, which is based on a levered beta of 1.335. 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.

View our latest analysis for Tidewater Renewables

SWOT Analysis for Tidewater Renewables

Next Steps:

Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. DCF models are not the be-all and end-all of investment valuation. 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 Tidewater Renewables, there are three fundamental items you should assess:

1. Risks: For example, we've discovered 2 warning signs for Tidewater Renewables (1 doesn't sit too well with us!) that you should be aware of before investing here.
2. Future Earnings: How does LCFS'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 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!

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

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.