Home Discount rate Triple Flag Precious Metals Corp. (TSE: TFPM) trading at a 31% discount?

Triple Flag Precious Metals Corp. (TSE: TFPM) trading at a 31% discount?

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Today we are going to review a valuation method used to estimate the attractiveness of Triple Flag Precious Metals Corp. (TSE: TFPM) as an investment opportunity by projecting its future cash flows and then discounting them to today’s value. We will use the Discounted Cash Flow (DCF) model on this occasion. Believe it or not, it’s not too hard to follow, as you will see in our example!

There are many ways businesses can be assessed, so we would like to point out that a DCF is not perfect for all situations. Anyone who wants to learn a little more about intrinsic value should read the Simply Wall St.

Check out our latest review for Triple Flag Precious Metals

The method

We use the 2-step growth model, which simply means that we take into account two stages of business growth. In the initial period, the business can have a higher growth rate, and the second stage is usually assumed to have a stable growth rate. In the first step, we need to estimate the cash flow of the business over the next ten years. 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.

In general, we assume that a dollar today is worth more than a dollar in the future, 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) estimate

2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Leverage FCF ($, Millions) US $ 167.9 million 168.6 million US dollars US $ 124.0 million US $ 116.0 million US $ 111.6 million US $ 109.1 million 107.9 million US dollars 107.6 million US dollars 107.9 million US dollars US $ 108.6 million
Source of estimated growth rate Analyst x6 Analyst x4 Analyst x1 Analyst x1 Is @ -3.83% East @ -2.22% Is @ -1.09% East @ -0.3% Is @ 0.26% Is @ 0.65%
Present value (in millions of dollars) discounted at 6.2% US $ 158 US $ 149 103 USD US $ 91.1 $ 82.5 US $ 75.9 $ 70.7 US $ 66.3 US $ 62.6 $ 59.3

(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = US $ 919 million

The second stage is also known as terminal value, this is the cash flow of the business 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 used the 5-year average of the 10-year government bond yield (1.6%) to estimate future growth. Similar to the 10-year “growth” period, we discount future cash flows to their present value, using a cost of equity of 6.2%.

Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = US $ 109 million × (1 + 1.6%) ÷ (6.2% – 1.6%) = US $ 2.4 billion

Present value of terminal value (PVTV)= TV / (1 + r)ten= US $ 2.4 billion ÷ (1 + 6.2%)ten= US $ 1.3 billion

Total value, or net worth, is then the sum of the present value of future cash flows, which in this case is $ 2.2 billion. In the last step, we divide the equity value by the number of shares outstanding. From the current stock price of C $ 12.1, the company appears to be quite undervalued with a 31% discount from the current stock price. Ratings are imprecise instruments, however, much like a telescope – move a few degrees and end up in another galaxy. Keep this in mind.

TSX Discounted Cash Flows: TFPM November 3, 2021

The hypotheses

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 consider Triple Flag Precious Metals 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 the debt. In this calculation, we used 6.2%, which is based on a leveraged beta of 1.068. 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 :

While a business valuation is important, ideally, it won’t be the only analysis you look at for a business. DCF models are not the alpha and omega of investment valuation. Preferably, you would apply different cases and assumptions and see their impact on the valuation of the business. If a business grows at a different rate, or if its cost of equity or risk-free rate changes sharply, output can be very different. Can we understand why the company trades at a discount to its intrinsic value? For Triple Flag Precious Metals, there are three essential factors you need to explore:

  1. Risks: We think you should evaluate the 3 warning signs for triple flag precious metals (2 are a bit of a concern!) That we reported before investing in the company.
  2. Management: Have insiders increased their shares to take advantage of market sentiment about TFPM’s future prospects? Check out our management and board analysis with information on CEO compensation and governance factors.
  3. Other high quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality stocks to get a feel for what you might be missing!

PS. Simply Wall St updates its DCF calculation for every Canadian stock every day, so if you want to find the intrinsic value of another stock just 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 the mentioned stocks.

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.


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