Estimating The Fair Value Of Maven Brands Inc. (CSE:MJ)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Maven Brands fair value estimate is CA$0.049
• Maven Brands' CA$0.04 share price indicates it is trading at similar levels as its fair value estimate
• Maven Brands' peers seem to be trading at a lower discount to fair value based onthe industry average of 8.6%

Today we will run through one way of estimating the intrinsic value of Maven Brands Inc. (CSE:MJ) by projecting its future cash flows and then discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. There's really not all that much to it, even though it might appear quite complex.

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. 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 Maven Brands

Is Maven Brands Fairly Valued?

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. In the first stage we need to estimate the cash flows to the business over the next ten years. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last 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

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (CA$, Millions)	CA$134.8k	CA$145.8k	CA$154.9k	CA$162.6k	CA$169.0k	CA$174.7k	CA$179.7k	CA$184.3k	CA$188.5k	CA$192.6k
Growth Rate Estimate Source	Est @ 10.90%	Est @ 8.17%	Est @ 6.26%	Est @ 4.92%	Est @ 3.99%	Est @ 3.33%	Est @ 2.87%	Est @ 2.55%	Est @ 2.32%	Est @ 2.17%
Present Value (CA$, Millions) Discounted @ 11%	CA$0.1	CA$0.1	CA$0.1	CA$0.1	CA$0.1	CA$0.09	CA$0.09	CA$0.08	CA$0.07	CA$0.07

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CA$961k

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 1.8%. We discount the terminal cash flows to today's value at a cost of equity of 11%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = CA$193k× (1 + 1.8%) ÷ (11%– 1.8%) = CA$2.1m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CA$2.1m÷ ( 1 + 11%)¹⁰= CA$747k

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$1.7m. 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$0.04, the company appears about fair value at a 18% 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

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 Maven Brands 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 11%, which is based on a levered beta of 1.553. 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:

Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. 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. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Maven Brands, there are three pertinent aspects you should consider:

1. Risks: As an example, we've found 4 warning signs for Maven Brands that you need to consider before investing here.
2. 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!
3. Other Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the CNSX 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.