Is There An Opportunity With Ayr Wellness Inc.'s (CSE:AYR.A) 33% Undervaluation?
Key Insights
- Using the 2 Stage Free Cash Flow to Equity, Ayr Wellness fair value estimate is CA$2.07
- Ayr Wellness' CA$1.39 share price signals that it might be 33% undervalued
- Analyst price target for AYR.A is US$8.14, which is 294% above our fair value estimate
In this article we are going to estimate the intrinsic value of Ayr Wellness Inc. (CSE:AYR.A) by taking the expected future cash flows and discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Believe it or not, it's not too difficult to follow, as you'll see from our example!
We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
See our latest analysis for Ayr Wellness
Is Ayr Wellness Fairly Valued?
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) estimate
2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | |
Levered FCF ($, Millions) | US$35.0m | US$23.0m | US$17.0m | US$14.0m | US$12.3m | US$11.4m | US$10.8m | US$10.5m | US$10.3m | US$10.3m |
Growth Rate Estimate Source | Analyst x1 | Analyst x1 | Est @ -26.12% | Est @ -17.75% | Est @ -11.88% | Est @ -7.78% | Est @ -4.90% | Est @ -2.89% | Est @ -1.49% | Est @ -0.50% |
Present Value ($, Millions) Discounted @ 14% | US$30.8 | US$17.8 | US$11.6 | US$8.4 | US$6.5 | US$5.3 | US$4.4 | US$3.8 | US$3.3 | US$2.9 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$95m
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 14%.
Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$10m× (1 + 1.8%) ÷ (14%– 1.8%) = US$88m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$88m÷ ( 1 + 14%)10= US$24m
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$119m. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of CA$1.4, the company appears quite good value at a 33% discount to where the stock price trades currently. 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 Ayr Wellness 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 14%, 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 Ayr Wellness
- Debt is well covered by earnings.
- Shareholders have been diluted in the past year.
- Forecast to reduce losses next year.
- Good value based on P/S ratio and estimated fair value.
- Debt is not well covered by operating cash flow.
- Has less than 3 years of cash runway based on current free cash flow.
- Not expected to become profitable over the next 3 years.
Looking Ahead:
Whilst important, the DCF calculation 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. 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. Why is the intrinsic value higher than the current share price? For Ayr Wellness, we've put together three relevant aspects you should consider:
- Risks: For example, we've discovered 4 warning signs for Ayr Wellness that you should be aware of before investing here.
- Future Earnings: How does AYR.A'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.
- 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.
About CNSX:AYR.A
Ayr Wellness
Operates as a vertically-integrated multi-state cannabis operator that cultivates, manufactures, and retails cannabis products and branded cannabis packaged goods.
Slight and fair value.