Estimating The Fair Value Of Tidewater Midstream and Infrastructure Ltd. (TSE:TWM)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Tidewater Midstream and Infrastructure fair value estimate is CA$0.74
• Tidewater Midstream and Infrastructure's CA$0.60 share price indicates it is trading at similar levels as its fair value estimate
• Industry average discount to fair value of 33% suggests Tidewater Midstream and Infrastructure's peers are currently trading at a higher discount

In this article we are going to estimate the intrinsic value of Tidewater Midstream and Infrastructure Ltd. (TSE:TWM) by taking the forecast future cash flows of the company and discounting them back to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

Check out our latest analysis for Tidewater Midstream and Infrastructure

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. 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.

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

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (CA$, Millions)	CA$76.5m	CA$49.0m	CA$35.5m	CA$28.9m	CA$25.3m	CA$23.3m	CA$22.1m	CA$21.5m	CA$21.2m	CA$21.1m
Growth Rate Estimate Source	Analyst x2	Analyst x1	Est @ -27.59%	Est @ -18.66%	Est @ -12.41%	Est @ -8.03%	Est @ -4.97%	Est @ -2.82%	Est @ -1.32%	Est @ -0.27%
Present Value (CA$, Millions) Discounted @ 10%	CA$69.3	CA$40.2	CA$26.4	CA$19.4	CA$15.4	CA$12.8	CA$11.0	CA$9.7	CA$8.7	CA$7.8

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CA$221m

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 (2.2%) 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 10%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = CA$21m× (1 + 2.2%) ÷ (10%– 2.2%) = CA$262m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CA$262m÷ ( 1 + 10%)¹⁰= CA$97m

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$318m. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of CA$0.6, the company appears about fair value at a 19% discount to where the stock price trades currently. 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

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual 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 Tidewater Midstream and Infrastructure 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 10%, 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.

Moving On:

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. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or 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 Tidewater Midstream and Infrastructure, we've compiled three important factors you should further examine:

1. Risks: As an example, we've found 2 warning signs for Tidewater Midstream and Infrastructure that you need to consider before investing here.
2. Future Earnings: How does TWM'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. 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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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.