Estimating The Intrinsic Value Of BeWhere Holdings Inc. (CVE:BEW)

Key Insights

• BeWhere Holdings' estimated fair value is CA$0.70 based on 2 Stage Free Cash Flow to Equity
• Current share price of CA$0.62 suggests BeWhere Holdings is potentially trading close to its fair value
• Industry average discount to fair value of 9.9% suggests BeWhere Holdings' peers are currently trading at a lower discount

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of BeWhere Holdings Inc. (CVE:BEW) as an investment opportunity by taking the expected future cash flows and discounting them to their present value. Our analysis will employ the Discounted Cash Flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

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. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

See our latest analysis for BeWhere Holdings

The Calculation

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) estimate

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (CA$, Millions)	CA$1.84m	CA$2.10m	CA$2.32m	CA$2.51m	CA$2.67m	CA$2.80m	CA$2.92m	CA$3.03m	CA$3.12m	CA$3.21m
Growth Rate Estimate Source	Est @ 19.40%	Est @ 14.24%	Est @ 10.62%	Est @ 8.09%	Est @ 6.32%	Est @ 5.07%	Est @ 4.21%	Est @ 3.60%	Est @ 3.17%	Est @ 2.88%
Present Value (CA$, Millions) Discounted @ 6.3%	CA$1.7	CA$1.9	CA$1.9	CA$2.0	CA$2.0	CA$1.9	CA$1.9	CA$1.9	CA$1.8	CA$1.7

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CA$19m

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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 2.2%. We discount the terminal cash flows to today's value at a cost of equity of 6.3%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = CA$3.2m× (1 + 2.2%) ÷ (6.3%– 2.2%) = CA$79m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CA$79m÷ ( 1 + 6.3%)¹⁰= CA$43m

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$61m. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of CA$0.6, the company appears about fair value at a 12% 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

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. 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 BeWhere Holdings 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 6.3%, which is based on a levered beta of 1.009. 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 BeWhere Holdings

Next Steps:

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. It's not possible to obtain a foolproof valuation with a DCF model. 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 example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For BeWhere Holdings, there are three pertinent aspects you should assess:

1. Risks: Case in point, we've spotted 3 warning signs for BeWhere Holdings you should be aware of.
2. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for BEW'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.