A Look At The Fair Value Of Points International Ltd. (TSE:PTS)
Today we will run through one way of estimating the intrinsic value of Points International Ltd. (TSE:PTS) by taking the expected future cash flows and discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.
See our latest analysis for Points International
Step by step through the calculation
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To start off with, we need to estimate the next ten years of cash flows. 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, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) estimate
| 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | |
| Levered FCF ($, Millions) | US$2.85m | US$10.5m | US$9.91m | US$10.7m | US$11.2m | US$11.7m | US$12.0m | US$12.4m | US$12.7m | US$13.0m |
| Growth Rate Estimate Source | Analyst x1 | Analyst x1 | Analyst x1 | Analyst x1 | Est @ 5.12% | Est @ 4.08% | Est @ 3.35% | Est @ 2.85% | Est @ 2.49% | Est @ 2.24% |
| Present Value ($, Millions) Discounted @ 10% | US$2.6 | US$8.7 | US$7.4 | US$7.2 | US$6.9 | US$6.5 | US$6.1 | US$5.7 | US$5.3 | US$5.0 |
| ("Est" = FCF growth rate estimated by Simply Wall St) 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 a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (1.7%) 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 10%. Terminal Value (TV)= FCF2030 × (1 + g) ÷ (r – g) = US$13m× (1 + 1.7%) ÷ (10%– 1.7%) = US$156m Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$156m÷ ( 1 + 10%)10= US$60m The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$121m. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of CA$12.8, 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. |