Calculating The Fair Value Of Total Telcom Inc. (CVE:TTZ)

Key Insights

• Total Telcom's estimated fair value is CA$0.25 based on 2 Stage Free Cash Flow to Equity
• Total Telcom's CA$0.21 share price indicates it is trading at similar levels as its fair value estimate
• Industry average discount to fair value of 49% suggests Total Telcom's peers are currently trading at a higher discount

Does the December share price for Total Telcom Inc. (CVE:TTZ) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by projecting its future cash flows and then discounting them to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

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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. 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.

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) estimate

	2026	2027	2028	2029	2030	2031	2032	2033	2034	2035
Levered FCF (CA$, Millions)	CA$405.3k	CA$370.6k	CA$351.5k	CA$341.7k	CA$337.9k	CA$338.0k	CA$340.9k	CA$345.7k	CA$352.0k	CA$359.4k
Growth Rate Estimate Source	Est @ -13.39%	Est @ -8.55%	Est @ -5.16%	Est @ -2.79%	Est @ -1.13%	Est @ 0.04%	Est @ 0.85%	Est @ 1.42%	Est @ 1.82%	Est @ 2.10%
Present Value (CA$, Millions) Discounted @ 7.2%	CA$0.4	CA$0.3	CA$0.3	CA$0.3	CA$0.2	CA$0.2	CA$0.2	CA$0.2	CA$0.2	CA$0.2

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CA$2.5m

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 (2.8%) 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 7.2%.

Terminal Value (TV)= FCF₂₀₃₅ × (1 + g) ÷ (r – g) = CA$359k× (1 + 2.8%) ÷ (7.2%– 2.8%) = CA$8.3m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CA$8.3m÷ ( 1 + 7.2%)¹⁰= CA$4.1m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is CA$6.6m. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of CA$0.2, the company appears about fair value at a 16% 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.

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. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 Total Telcom 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 7.2%, which is based on a levered beta of 1.057. 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.

Check out our latest analysis for Total Telcom

SWOT Analysis for Total Telcom

Looking Ahead:

Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize 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 instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Total Telcom, we've put together three further aspects you should look at:

1. Risks: Case in point, we've spotted 4 warning signs for Total Telcom you should be aware of, and 2 of them are a bit concerning.
2. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for TTZ's future outlook? Check out our management and board analysis with insights 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 an idea of what else is out there you may 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 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.