Are Investors Undervaluing Thunderbird Entertainment Group Inc. (CVE:TBRD) By 22%?

Key Insights

• The projected fair value for Thunderbird Entertainment Group is CA$2.40 based on 2 Stage Free Cash Flow to Equity
• Thunderbird Entertainment Group is estimated to be 22% undervalued based on current share price of CA$1.86
• When compared to theindustry average discount to fair value of 22%, Thunderbird Entertainment Group's competitors seem to be trading at a lesser discount

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Thunderbird Entertainment Group Inc. (CVE:TBRD) as an investment opportunity by taking the expected future cash flows and discounting them to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.

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 Thunderbird Entertainment Group

The Model

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.

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

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (CA$, Millions)	CA$7.84m	CA$7.53m	CA$7.37m	CA$7.31m	CA$7.32m	CA$7.37m	CA$7.46m	CA$7.57m	CA$7.69m	CA$7.83m
Growth Rate Estimate Source	Analyst x1	Est @ -3.92%	Est @ -2.09%	Est @ -0.81%	Est @ 0.09%	Est @ 0.72%	Est @ 1.15%	Est @ 1.46%	Est @ 1.68%	Est @ 1.83%
Present Value (CA$, Millions) Discounted @ 7.7%	CA$7.3	CA$6.5	CA$5.9	CA$5.4	CA$5.0	CA$4.7	CA$4.4	CA$4.2	CA$3.9	CA$3.7

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CA$51m

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 7.7%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = CA$7.8m× (1 + 2.2%) ÷ (7.7%– 2.2%) = CA$144m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CA$144m÷ ( 1 + 7.7%)¹⁰= CA$68m

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$120m. 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$1.9, the company appears a touch undervalued at a 22% discount to where the stock price trades currently. 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

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 Thunderbird Entertainment Group 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 7.7%, which is based on a levered beta of 1.348. 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.

Next Steps:

Although the valuation of a company is important, it is only one of many factors that you need to assess for a company. It's not possible to obtain a foolproof valuation with a DCF model. 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. Why is the intrinsic value higher than the current share price? For Thunderbird Entertainment Group, we've put together three relevant elements you should consider:

1. Risks: For instance, we've identified 1 warning sign for Thunderbird Entertainment Group that you should be aware of.
2. Future Earnings: How does TBRD'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 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.