Calculating The Fair Value Of IBEX Technologies Inc. (CVE:IBT)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, IBEX Technologies fair value estimate is CA$0.99
• With CA$0.99 share price, IBEX Technologies appears to be trading close to its estimated fair value
• Industry average of 70% suggests IBEX Technologies' peers are currently trading at a higher premium to fair value

In this article we are going to estimate the intrinsic value of IBEX Technologies Inc. (CVE:IBT) by taking the forecast future cash flows of the company and discounting them back to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. It may sound complicated, but actually it is quite simple!

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

See our latest analysis for IBEX Technologies

Crunching The Numbers

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. 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, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) forecast

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (CA$, Millions)	CA$1.09m	CA$1.07m	CA$1.06m	CA$1.06m	CA$1.07m	CA$1.08m	CA$1.09m	CA$1.11m	CA$1.12m	CA$1.14m
Growth Rate Estimate Source	Est @ -3.58%	Est @ -1.95%	Est @ -0.81%	Est @ -0.01%	Est @ 0.55%	Est @ 0.95%	Est @ 1.22%	Est @ 1.41%	Est @ 1.55%	Est @ 1.64%
Present Value (CA$, Millions) Discounted @ 5.9%	CA$1.0	CA$1.0	CA$0.9	CA$0.8	CA$0.8	CA$0.8	CA$0.7	CA$0.7	CA$0.7	CA$0.6

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CA$8.0m

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 5.9%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = CA$1.1m× (1 + 1.9%) ÷ (5.9%– 1.9%) = CA$29m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CA$29m÷ ( 1 + 5.9%)¹⁰= CA$16m

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$24m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of CA$1.0, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

Important 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 IBEX Technologies 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 5.9%, which is based on a levered beta of 0.800. 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.

Moving On:

Valuation is only one side of the coin in terms of building your investment thesis, and 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. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For IBEX Technologies, there are three further factors you should assess:

1. Risks: We feel that you should assess the 2 warning signs for IBEX Technologies (1 is a bit unpleasant!) we've flagged before making an investment in the company.
2. 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!
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 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.