The November share price of Elys Game Technology, Corp. (NASDAQ: ELYS) Reflect Its True Value? Today we’re going to estimate the intrinsic value of the stock by taking the company’s future cash flow forecast and discounting it to today’s value. This will be done using the Discounted Cash Flow (DCF) model. Before you think you won’t be able to figure it out, read on! It’s actually a lot less complex than you might imagine.
We draw your attention to the fact that there are many ways to assess a business and, like DCF, each technique has advantages and disadvantages in certain scenarios. If you want to know more about discounted cash flows, the rationale for this calculation can be read in detail in the Simply Wall St analysis model.
Crunch the numbers
We use what is called a two-step model, which simply means that we have two different periods of growth rate for the cash flow of the business. Usually the first stage is higher growth and the second stage is lower growth stage. To begin with, we need to estimate the next ten years of cash flow. Where possible, we use analyst estimates, but when these are not available, we extrapolate the previous free cash flow (FCF) from the last estimate or stated value. We assume that companies with decreasing free cash flow will slow their rate of contraction, and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow down more in the early years than in subsequent years.
A DCF is based on the idea that a dollar in the future is worth less than a dollar today, so we need to discount the sum of these future cash flows to arrive at an estimate of the present value:
10-year free cash flow (FCF) forecast
|Leverage FCF ($, Millions)||US $ 2.88 million||US $ 14.6 million||US $ 15.1 million||US $ 11.9 million||US $ 10.2 million||US $ 9.16 million||8.59 million US dollars||US $ 8.26 million||US $ 8.09 million||US $ 8.02 million|
|Source of estimated growth rate||Analyst x2||Analyst x1||Analyst x1||Analyst x1||Is @ -14.79%||Is @ -9.77%||Is @ -6.25%||Is @ -3.79%||East @ -2.06%||East @ -0.86%|
|Present value (in millions of dollars) discounted at 6.9%||2.7 USD||$ 12.8||$ 12.4||$ 9.1||$ 7.3||US $ 6.1||$ 5.4||4.8 USD||4.4 USD||$ 4.1|
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = US $ 69 million
It is now a matter of calculating the Terminal Value, which takes into account all future cash flows after this ten-year period. The Gordon growth formula is used to calculate the 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 their present value at a cost of equity of 6.9%.
Terminal value (TV)= FCF2031 Ã (1 + g) Ã· (r – g) = US $ 8.0M Ã (1 + 2.0%) Ã· (6.9% – 2.0%) = US $ 166M
Present value of terminal value (PVTV)= TV / (1 + r)ten= 166 million US dollars Ã· (1 + 6.9%)ten= US $ 85 million
The total value is the sum of the cash flows for the next ten years plus the final present value, which gives the total value of equity, which in this case is $ 154 million. The last step is then to divide the equity value by the number of shares outstanding. Compared to the current share price of US $ 5.0, the company appears a bit undervalued at a 25% discount from where the stock price is currently trading. Ratings are imprecise instruments, however, much like a telescope – move a few degrees and end up in another galaxy. Keep this in mind.
NasdaqCM: ELYS Discounted Cash Flow November 3, 2021
Now the most important inputs to a discounted cash flow are the discount rate and, of course, the actual cash flow. If you don’t agree with these results, try the calculation yourself and play with the assumptions. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we view Elys Game Technology 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 takes into account debt. In this calculation, we used 6.9%, which is based on a leveraged beta of 1.126. Beta is a measure of the volatility of a stock relative to the market as a whole. We get our beta from the industry average beta from globally comparable companies, with a limit imposed between 0.8 and 2.0, which is a reasonable range for a stable business.
To move on :
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 business. The DCF model is not a perfect equity valuation tool. Preferably, you would apply different cases and assumptions and see their impact on the valuation of the business. For example, if the terminal value growth rate is adjusted slightly, it can dramatically change the overall result. Can we understand why the company trades at a discount to its intrinsic value? For Elys Game Technology, we have put together three important factors that you need to assess:
- Risks: For example, we have identified 3 warning signs for Elys Game Technology that you need to be aware of.
- Future benefits: How does ELYS ‘growth rate compare to that of its peers and the market at large? Deepen the number of analyst consensus for the coming years by interacting with our free chart of analysts’ growth expectations.
- Other high quality alternatives: Do you like a good all-rounder? To explore our interactive list of high quality actions to get an idea of ââwhat else you might be missing!
PS. Simply Wall St updates its DCF calculation for every US stock every day, so if you want to find the intrinsic value of any other stock, you just need to search here.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.