- United Kingdom
- Metals and Mining
Estimating The Fair Value Of Ecora Resources PLC (LON:ECOR)
- Using the 2 Stage Free Cash Flow to Equity, Ecora Resources fair value estimate is UK£1.28
- Current share price of UK£1.12 suggests Ecora Resources is potentially trading close to its fair value
- Our fair value estimate is 89% higher than Ecora Resources' analyst price target of US$2.41
Today we will run through one way of estimating the intrinsic value of Ecora Resources PLC (LON:ECOR) by projecting its future cash flows and then discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
See our latest analysis for Ecora Resources
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) forecast
|Levered FCF ($, Millions)||US$29.8m||US$45.4m||US$56.1m||US$44.8m||US$38.5m||US$34.9m||US$32.7m||US$31.4m||US$30.6m||US$30.2m|
|Growth Rate Estimate Source||Analyst x4||Analyst x4||Analyst x2||Analyst x1||Est @ -14.03%||Est @ -9.48%||Est @ -6.29%||Est @ -4.06%||Est @ -2.49%||Est @ -1.40%|
|Present Value ($, Millions) Discounted @ 9.3%||US$27.3||US$38.0||US$42.9||US$31.4||US$24.7||US$20.5||US$17.5||US$15.4||US$13.7||US$12.4|
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$244m
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 1.2%. We discount the terminal cash flows to today's value at a cost of equity of 9.3%.
Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = US$30m× (1 + 1.2%) ÷ (9.3%– 1.2%) = US$374m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$374m÷ ( 1 + 9.3%)10= US$153m
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$397m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of UK£1.1, the company appears about fair value at a 12% discount to where the stock price trades currently. 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.
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 Ecora Resources 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 9.3%, which is based on a levered beta of 1.171. 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 Ecora Resources
- Debt is not viewed as a risk.
- Dividends are covered by earnings and cash flows.
- Dividend is low compared to the top 25% of dividend payers in the Metals and Mining market.
- Shareholders have been diluted in the past year.
- Good value based on P/E ratio and estimated fair value.
- Significant insider buying over the past 3 months.
- Annual earnings are forecast to decline for the next 4 years.
Although the valuation of a company is important, 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 Ecora Resources, there are three important factors you should further research:
- Risks: For example, we've discovered 4 warning signs for Ecora Resources (1 is a bit concerning!) that you should be aware of before investing here.
- Future Earnings: How does ECOR'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 LSE every day. If you want to find the calculation for other stocks just search here.
Valuation is complex, but we're helping make it simple.
Find out whether Ecora Resources is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
Ecora Resources PLC operates as a natural resources royalty and streaming company.
Good value with adequate balance sheet.