Discover essential financial strategies tailored for your immediate family. Secure their future with budgeting tips, investment advice, and effective planning to ensure lasting financial stability.
Discover essential financial strategies tailored for your immediate family. Secure their future with budgeting tips, investment advice, and effective planning to ensure lasting financial stability.
The projected fair value for Maxim Power is CA$4.62 based on 2 Stage Free Cash Flow to Equity
With CA$5.08 share price, Maxim Power appears to be trading close to its estimated fair value
Peers of Maxim Power are currently trading on average at a 61% discount
In this article we are going to estimate the intrinsic value of Maxim Power Corp. (TSE:MXG) by taking the expected future cash flows and discounting them to today’s value. We will use the Discounted Cash Flow (DCF) model on this occasion. There’s really not all that much to it, even though it might appear quite complex.
We generally believe that a company’s value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company’s cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, we need to estimate the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company’s last reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today’s dollars:
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF (CA$, Millions)
CA$13.2m
CA$12.3m
CA$11.8m
CA$11.5m
CA$11.4m
CA$11.4m
CA$11.4m
CA$11.6m
CA$11.8m
CA$12.0m
Growth Rate Estimate Source
Est @ -11.17%
Est @ -7.14%
Est @ -4.31%
Est @ -2.34%
Est @ -0.96%
Est @ 0.01%
Est @ 0.69%
Est @ 1.16%
Est @ 1.50%
Est @ 1.73%
Present Value (CA$, Millions) Discounted @ 5.7%
CA$12.5
CA$11.0
CA$10.0
CA$9.2
CA$8.6
CA$8.2
CA$7.8
CA$7.4
CA$7.1
CA$6.9
(“Est” = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = CA$89m
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. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country’s GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.3%) to estimate future growth. In the same way as with the 10-year ‘growth’ period, we discount future cash flows to today’s value, using a cost of equity of 5.7%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CA$357m÷ ( 1 + 5.7%)10= CA$205m
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 CA$294m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of CA$5.1, the company appears around fair value at the time of writing. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.
TSX:MXG Discounted Cash Flow December 22nd 2024
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. 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 Maxim Power 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 5.7%, which is based on a levered beta of 0.831. 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.
Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. 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 Maxim Power, we’ve compiled three relevant aspects you should explore:
Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for MXG’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
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. 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.
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.
