Does the January share price for Wayland Group (

CNSX:WAYL

) reflect it’s really worth?after fmla runs out Today, I will calculate the stock’s intrinsic value by taking the foreast future cash flows of the company and discounting them back to today’s value. I will be using the discounted cash flows (DCF) model. It may sound complicated, but actually it is quite simple! Anyone interested in learning a bit more about intrinsic value should have a read of the

Simply Wall St analysis model

. If you are reading this and its not January 2019 then I highly recommend you check out the latest calculation for Wayland Group by following the link below.

See our latest analysis for Wayland Group

What’s the value?

I’m 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 perpetual stable growth rate. To start off with we need to estimate the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount this to its value today and sum up the total to get the present value of these cash flows.

5-year cash flow estimate

2019

2020

2021

2022

2023

Levered FCF (CA$, Millions)

CA$-28.00

CA$30.04

CA$35.44

CA$41.47

CA$48.10

Source

Analyst x1

Analyst x1

Est @ 18%, capped from 19.91%

Est @ 17%, capped from 19.91%

Est @ 16%, capped from 19.91%

Present Value Discounted @ 17.66%

CA$-23.80

CA$21.70

CA$21.76

CA$21.64

CA$21.33

Present Value of 5-year Cash Flow (PVCF)

= CA$63m

The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of the GDP. In this case I have used the 10-year government bond rate (2.3%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 17.7%.

Terminal Value (TV)

= FCF

2023

× (1 + g) ÷ (r – g) = CA$48m × (1 + 2.3%) ÷ (17.7% – 2.3%) = CA$321m

Present Value of Terminal Value (PVTV)

= TV / (1 + r)

5

= CA$321m ÷ ( 1 + 17.7%)

5

= CA$142m

The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is CA$205m. To get the intrinsic value per share, we divide this by the total number of shares outstanding, or the equivalent number if this is a depositary receipt or ADR.

This results in an intrinsic value of CA$0.96

. Relative to the current share price of CA$0.94, the stock is about right, perhaps slightly undervalued at a 2.2% discount to what it is available for right now.

Story continues

CNSX:WAYL Intrinsic Value Export January 2nd 19

Important assumptions

I’d like to point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you don’t agree with my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at Wayland Group as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 17.7%, which is based on a levered beta of 2. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Next Steps:

Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company. For WAYL, I’ve put together three relevant factors you should further examine:

Financial Health

: Does WAYL have a healthy balance sheet? Take a look at our

free balance sheet analysis with six simple checks

on key factors like leverage and risk.

Future Earnings

: How does WAYL’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 High Quality Alternatives

: Are there other high quality stocks you could be holding instead of WAYL? 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 does a DCF calculation for every CA stock every 6 hours, so if you want to find the intrinsic value of any other stock just

search here

.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at

[email protected]

.

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