A Look At The Intrinsic Value Of TVA Group Inc. (TSE:TVA.B)

Key Insights

• The projected fair value for TVA Group is CA$1.44 based on 2 Stage Free Cash Flow to Equity

• Current share price of CA$1.30 suggests TVA Group is potentially trading close to its fair value

• Industry average discount to fair value of 16% suggests TVA Group's peers are currently trading at a higher discount

Today we will run through one way of estimating the intrinsic value of TVA Group Inc. (TSE:TVA.B) by taking the expected future cash flows and discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Believe it or not, it's not too difficult to follow, as you'll see from our example!

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

Check out our latest analysis for TVA Group

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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) forecast

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (CA$, Millions)	CA$5.20m	CA$5.03m	CA$4.95m	CA$4.92m	CA$4.93m	CA$4.97m	CA$5.02m	CA$5.09m	CA$5.16m	CA$5.25m
Growth Rate Estimate Source	Analyst x1	Est @ -3.18%	Est @ -1.65%	Est @ -0.58%	Est @ 0.18%	Est @ 0.70%	Est @ 1.07%	Est @ 1.33%	Est @ 1.51%	Est @ 1.64%
Present Value (CA$, Millions) Discounted @ 9.2%	CA$4.8	CA$4.2	CA$3.8	CA$3.5	CA$3.2	CA$2.9	CA$2.7	CA$2.5	CA$2.3	CA$2.2

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CA$32m

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 1.9%. We discount the terminal cash flows to today's value at a cost of equity of 9.2%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = CA$5.2m× (1 + 1.9%) ÷ (9.2%– 1.9%) = CA$73m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CA$73m÷ ( 1 + 9.2%)¹⁰= CA$30m

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$62m. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of CA$1.3, the company appears about fair value at a 10.0% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf

The Assumptions

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 TVA Group 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 9.2%, which is based on a levered beta of 1.459. 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 TVA Group

Strength

• Debt is well covered by earnings.

Weakness

• No major weaknesses identified for TVA.B.

Opportunity

• Good value based on P/S ratio and estimated fair value.

Threat

• Debt is not well covered by operating cash flow.

Looking Ahead:

Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. It's not possible to obtain a foolproof valuation with a DCF model. 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. 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 TVA Group, we've put together three pertinent items you should further examine:

1. Risks: Be aware that TVA Group is showing 2 warning signs in our investment analysis , and 1 of those is a bit concerning...

2. Future Earnings: How does TVA.B'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.

3. 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. Simply Wall St updates its DCF calculation for every Canadian stock every day, so if you want to find the intrinsic value of any other stock just search here.

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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.