A Look At The Intrinsic Value Of MYND Life Sciences Inc. (CSE:MYND)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, MYND Life Sciences fair value estimate is CA$0.03
• With CA$0.035 share price, MYND Life Sciences appears to be trading close to its estimated fair value
• Industry average of 50% suggests MYND Life Sciences' peers are currently trading at a higher premium to fair value

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of MYND Life Sciences Inc. (CSE:MYND) as an investment opportunity 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. Believe it or not, it's not too difficult to follow, as you'll see from our example!

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

View our latest analysis for MYND Life Sciences

The Method

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. To begin with, we have to get estimates of the next ten years of cash flows. 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) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (CA$, Millions)	CA$30.9k	CA$41.2k	CA$51.1k	CA$60.0k	CA$67.6k	CA$74.0k	CA$79.3k	CA$83.8k	CA$87.5k	CA$90.7k
Growth Rate Estimate Source	Est @ 47.06%	Est @ 33.50%	Est @ 24.01%	Est @ 17.36%	Est @ 12.71%	Est @ 9.46%	Est @ 7.18%	Est @ 5.58%	Est @ 4.47%	Est @ 3.68%
Present Value (CA$, Millions) Discounted @ 6.8%	CA$0.03	CA$0.04	CA$0.04	CA$0.05	CA$0.05	CA$0.05	CA$0.05	CA$0.05	CA$0.05	CA$0.05

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CA$447k

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 1.9%. We discount the terminal cash flows to today's value at a cost of equity of 6.8%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = CA$91k× (1 + 1.9%) ÷ (6.8%– 1.9%) = CA$1.9m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CA$1.9m÷ ( 1 + 6.8%)¹⁰= CA$977k

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$1.4m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of CA$0.04, the company appears around fair value 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.

Important Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 MYND Life Sciences 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 6.8%, which is based on a levered beta of 0.983. 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 MYND Life Sciences

Looking Ahead:

Although the valuation of a company is important, it is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For MYND Life Sciences, we've put together three relevant items you should look at:

1. Risks: To that end, you should learn about the 6 warning signs we've spotted with MYND Life Sciences (including 5 which shouldn't be ignored) .
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 Top Analyst Picks: Interested to see what the analysts are thinking? Take a look at our interactive list of analysts' top stock picks to find out what they feel might have an attractive future outlook!

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.