Intrinsic Value Analysis: IBEX Technologies Inc. (CVE:IBT) Reviewed
IBEX Technologies' peers are trading at a higher premium to fair value, suggesting the company may be undervalued.
In this article, we will be using the Discounted Cash Flow (DCF) model to estimate the intrinsic value of IBEX Technologies Inc. (CVE:IBT). The DCF model takes into account the expected future cash flows of a company and discounts them to their present value. This valuation metric is just one among many, but it provides valuable insights into a company's worth.
To begin, we will be using a two-stage DCF model. The first stage considers a higher growth period, which eventually levels off towards the terminal value in the second stage. In order to estimate the cash flows for the next ten years, we will be extrapolating the previous free cash flow (FCF) from the company's last reported value. We assume that companies with shrinking free cash flow will slow their rate of shrinkage, while companies with growing free cash flow will see their growth rate slow over this period. This reflects the fact that growth tends to slow more in the early years than in later years.
Once we have calculated the present value of the 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. We will be using the Gordon Growth formula to calculate the Terminal Value, with a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 1.9%. The terminal cash flows will be discounted to today's value at a cost of equity of 5.9%.
The total value is the sum of the cash flows for the next ten years plus the discounted terminal value, resulting in the Total Equity Value of CA$24m. To determine the fair value per share, we divide the equity value by the number of shares outstanding. At the time of writing, the company appears to be trading around fair value, with a current share price of CA$1.2. However, it is important to remember that valuations are imprecise and can be subject to change.
The discount rate and the actual cash flows are the most important inputs to a discounted cash flow. It is essential to come up with your own evaluation of a company's future performance and check your own assumptions. Additionally, the DCF model does not take into account the possible cyclicality of an industry or a company's future capital requirements, so it does not provide a complete picture of a company's potential performance. In this calculation, we have used a discount rate of 5.9%, based on a levered beta of 0.800. Beta is a measure of a stock's volatility compared to the market as a whole, and we have obtained our beta from the industry average beta of globally comparable companies.
While the valuation of a company is important, it should not be the sole factor in your analysis. DCF models are useful for testing assumptions and theories to determine if a company is undervalued or overvalued. Adjusting the terminal value growth rate, for example, can have a significant impact on the overall result. In addition to the DCF model, there are three additional elements to consider when assessing IBEX Technologies.
Overall, the DCF model provides valuable insights into a company's intrinsic value, but it is important to consider other factors and conduct a comprehensive analysis. Simply Wall St updates its DCF calculation for every Canadian stock daily, so you can find the intrinsic value of any other stock by searching on their website.