Key Insights
- Using the 2 Stage Free Cash Flow to Equity, Boralex fair value estimate is CA$38.10
- Current share price of CA$38.79 suggests Boralex is potentially trading close to its fair value
- Analyst price target for BLX is CA$46.43, which is 22% above our fair value estimate
Today we will run through one way of estimating the intrinsic value of Boralex Inc. (TSE:BLX) by taking the forecast future cash flows of the company and discounting them back to today's value. This will be done using the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
See our latest analysis for Boralex
What's The Estimated Valuation?
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) forecast
2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | |
Levered FCF (CA$, Millions) | CA$198.0m | CA$170.1m | CA$194.5m | CA$220.0m | CA$214.0m | CA$211.3m | CA$210.6m | CA$211.2m | CA$212.7m | CA$214.9m |
Growth Rate Estimate Source | Analyst x1 | Analyst x2 | Analyst x2 | Analyst x1 | Analyst x1 | Est @ -1.25% | Est @ -0.35% | Est @ 0.28% | Est @ 0.73% | Est @ 1.04% |
Present Value (CA$, Millions) Discounted @ 6.5% | CA$186 | CA$150 | CA$161 | CA$171 | CA$156 | CA$145 | CA$135 | CA$127 | CA$121 | CA$114 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CA$1.5b
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 1.8%. We discount the terminal cash flows to today's value at a cost of equity of 6.5%.
Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = CA$215m× (1 + 1.8%) ÷ (6.5%– 1.8%) = CA$4.6b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CA$4.6b÷ ( 1 + 6.5%)10= CA$2.4b
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$3.9b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of CA$38.8, 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 Boralex 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 6.5%, 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.
SWOT Analysis for Boralex
- Earnings growth over the past year exceeded the industry.
- Interest payments on debt are not well covered.
- Dividend is low compared to the top 25% of dividend payers in the Renewable Energy market.
- Expensive based on P/E ratio and estimated fair value.
- Annual earnings are forecast to grow faster than the Canadian market.
- Significant insider buying over the past 3 months.
- Debt is not well covered by operating cash flow.
- Dividends are not covered by earnings.
- Annual revenue is forecast to grow slower than the Canadian market.
Next Steps:
Although the valuation of a company is important, it shouldn't be the only metric you look at when researching 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 Boralex, we've compiled three further aspects you should assess:
- Risks: As an example, we've found 2 warning signs for Boralex (1 makes us a bit uncomfortable!) that you need to consider before investing here.
- Future Earnings: How does BLX's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
- 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!
PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the TSX every day. If you want to find the calculation for other stocks just search here.
Valuation is complex, but we're here to simplify it.
Discover if Boralex might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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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.
About TSX:BLX
Boralex
Engages in the development, construction, and operation of renewable energy power facilities in Canada, France, the United States, and the United Kingdom.
Solid track record established dividend payer.