Estimating The Fair Value Of Many Bright Ideas Technologies Inc. (CVE:MBI.H)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Many Bright Ideas Technologies fair value estimate is CA$0.067
• Many Bright Ideas Technologies' CA$0.08 share price indicates it is trading at similar levels as its fair value estimate
• Many Bright Ideas Technologies' peers are currently trading at a discount of 47% on average

Does the April share price for Many Bright Ideas Technologies Inc. (CVE:MBI.H) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by projecting its future cash flows and then discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.

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.

Check out our latest analysis for Many Bright Ideas 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 start off with, we need to estimate 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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) forecast

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF ($, Millions)	US$5.9k	US$10.1k	US$15.1k	US$20.5k	US$25.7k	US$30.4k	US$34.5k	US$38.0k	US$40.9k	US$43.4k
Growth Rate Estimate Source	Est @ 100.07%	Est @ 70.65%	Est @ 50.05%	Est @ 35.63%	Est @ 25.54%	Est @ 18.47%	Est @ 13.53%	Est @ 10.07%	Est @ 7.64%	Est @ 5.95%
Present Value ($, Millions) Discounted @ 5.8%	US$0.006	US$0.009	US$0.01	US$0.02	US$0.02	US$0.02	US$0.02	US$0.02	US$0.02	US$0.02

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$182k

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 2.0%. We discount the terminal cash flows to today's value at a cost of equity of 5.8%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = US$43k× (1 + 2.0%) ÷ (5.8%– 2.0%) = US$1.2m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= US$1.2m÷ ( 1 + 5.8%)¹⁰= US$667k

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$849k. 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$0.08, 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.

The 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 Many Bright Ideas 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 5.8%, which is based on a levered beta of 0.822. 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 Many Bright Ideas Technologies

Looking Ahead:

Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn't be the only metric you look at when researching 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?" 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 Many Bright Ideas Technologies, we've put together three fundamental elements you should look at:

1. Risks: Consider for instance, the ever-present spectre of investment risk. We've identified 5 warning signs with Many Bright Ideas Technologies , and understanding these should be part of your investment process.
2. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for MBI.H's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
3. 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!

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.