Stock Analysis

Is WildBrain Ltd. (TSE:WILD) Expensive For A Reason? A Look At Its Intrinsic Value

TSX:WILD
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Key Insights

  • The projected fair value for WildBrain is CA$1.59 based on 2 Stage Free Cash Flow to Equity
  • Current share price of CA$2.04 suggests WildBrain is potentially 28% overvalued
  • Analyst price target for WILD is CA$3.51, which is 120% above our fair value estimate

Today we will run through one way of estimating the intrinsic value of WildBrain Ltd. (TSE:WILD) by taking the expected future cash flows and discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

See our latest analysis for WildBrain

The Calculation

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. To begin with, we have to get estimates of 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 discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) estimate

2023 2024 2025 2026 2027 2028 2029 2030 2031 2032
Levered FCF (CA$, Millions) CA$31.4m CA$34.8m CA$34.2m CA$34.0m CA$34.0m CA$34.3m CA$34.6m CA$35.0m CA$35.5m CA$36.0m
Growth Rate Estimate Source Analyst x2 Analyst x2 Est @ -1.61% Est @ -0.60% Est @ 0.11% Est @ 0.60% Est @ 0.95% Est @ 1.19% Est @ 1.36% Est @ 1.48%
Present Value (CA$, Millions) Discounted @ 13% CA$27.8 CA$27.2 CA$23.7 CA$20.8 CA$18.5 CA$16.4 CA$14.7 CA$13.1 CA$11.8 CA$10.6

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CA$185m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 (1.8%) 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 13%.

Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = CA$36m× (1 + 1.8%) ÷ (13%– 1.8%) = CA$325m

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CA$325m÷ ( 1 + 13%)10= CA$95m

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$280m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of CA$2.0, the company appears slightly overvalued 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.

dcf
TSX:WILD Discounted Cash Flow March 21st 2023

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 WildBrain 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 13%, which is based on a levered beta of 1.898. 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 WildBrain

Strength
  • No major strengths identified for WILD.
Weakness
  • Interest payments on debt are not well covered.
Opportunity
  • Annual earnings are forecast to grow faster than the Canadian market.
  • Good value based on P/S ratio compared to estimated Fair P/S ratio.
Threat
  • Debt is not well covered by operating cash flow.
  • Revenue is forecast to grow slower than 20% per year.

Moving On:

Whilst important, the DCF calculation shouldn't be the only metric you look at when researching 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?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Can we work out why the company is trading at a premium to intrinsic value? For WildBrain, we've put together three important elements you should assess:

  1. Risks: For instance, we've identified 2 warning signs for WildBrain (1 is a bit concerning) you should be aware of.
  2. Future Earnings: How does WILD'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: 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!

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.

Valuation is complex, but we're helping make it simple.

Find out whether WildBrain is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.