An Intrinsic Calculation For Interfor Corporation (TSE:IFP) Suggests It's 26% Undervalued

Key Insights

• The projected fair value for Interfor is CA$24.42 based on 2 Stage Free Cash Flow to Equity

• Interfor's CA$18.04 share price signals that it might be 26% undervalued

• Our fair value estimate is 6.1% lower than Interfor's analyst price target of CA$26.00

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Interfor Corporation (TSE:IFP) as an investment opportunity by taking the expected future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

View our latest analysis for Interfor

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) forecast

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (CA$, Millions)	-CA$8.77m	CA$125.7m	CA$129.8m	CA$133.6m	CA$137.2m	CA$140.6m	CA$143.9m	CA$147.2m	CA$150.5m	CA$153.8m
Growth Rate Estimate Source	Analyst x4	Analyst x4	Est @ 3.30%	Est @ 2.93%	Est @ 2.68%	Est @ 2.50%	Est @ 2.37%	Est @ 2.29%	Est @ 2.22%	Est @ 2.18%
Present Value (CA$, Millions) Discounted @ 11%	-CA$7.9	CA$101	CA$94.2	CA$87.1	CA$80.4	CA$74.0	CA$68.1	CA$62.6	CA$57.5	CA$52.8

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CA$670m

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. 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 2.1%. We discount the terminal cash flows to today's value at a cost of equity of 11%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = CA$154m× (1 + 2.1%) ÷ (11%– 2.1%) = CA$1.7b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CA$1.7b÷ ( 1 + 11%)¹⁰= CA$586m

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$1.3b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of CA$18.0, the company appears a touch undervalued at a 26% 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

Important Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 Interfor 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 11%, which is based on a levered beta of 2.000. 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.

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. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Can we work out why the company is trading at a discount to intrinsic value? For Interfor, we've put together three fundamental aspects you should assess:

1. Risks: For instance, we've identified 1 warning sign for Interfor that you should be aware of.

2. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for IFP'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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com