Does Polaris Renewable Energy Inc. trade? (TSE:PIF) is 23% off?

Key insights

• Polaris Renewable Energy has a projected fair value of C$17.78 based on two-stage free cash flow to equity
• The current share price of C$13.70 suggests that Polaris Renewable Energy is potentially 23% undervalued
• The analyst price target for PIF is $20.87, which is 17% above our fair value estimate

In this article, we are going to estimate the intrinsic value of Polaris Renewable Energy Inc. (TSE:PIF) by taking expected future cash flows and discounting them to their present value. This is done using a discounted cash flow (DCF) model. Before you think you won’t be able to understand it, just keep reading! It’s actually much less complicated than you might think.

Companies can be valued in many ways, so please note that DCF is not ideal in every situation. If you want to learn more about discounted cash flow, the reasoning behind this calculation can be read in detail in the Simply Wall St analytical model.

View our latest analysis for Polaris Renewable Energy

Is Polaris renewable energy fairly priced?

We will use a two-stage DCF model, which, as the name suggests, takes into account two stages of growth. The first stage is generally a period of higher growth, which slows down towards the final value, captured in the second period of “sustainable growth”. First, we need to estimate cash flows over the next ten years. 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 that 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 the fact that economic growth tends to slow more in the early years than in later years.

DCF is based on the assumption that a dollar in the future will be less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today’s dollars:

Free cash flow (FCF) estimate over 10 years

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Leveraged FCF ($, millions)	$32.7 million	$22.2 million	$16.9 million	$14.1 million	$12.6 million	$11.8 million	$11.3 million	$11.0 million	$10.9 million	$10.9 million
Source of estimated growth rate	Analyst x1	Analyst x1	Respect. at -24.02%	Respect. at -16.19%	Respect. at -10.71%	Respect. at -6.87%	Respect. at -4.19%	Respect. at -2.31%	Respect. at -0.99%	Respect. at -0.07%
Present value (millions of dollars) discounted @ 6.1%	$30.8	$19.7	$14.1	$11.2	$9.4	$8.2	$7.4	$6.9	$6.4	$6.0

(“Est” = FCF growth rate estimated by Simply Wall St)
10-year Present Value of Cash Flows (PVCF) = 120 million dollars

The second stage is also known as residual value and is the company’s cash flow after the first stage. The Gordon Growth formula is used to calculate terminal value with a future annual growth rate equal to the five-year average 10-year government bond yield of 2.1%. We discount the final cash flows to today’s value at a cost of equity of 6.1%.

Final value (TV)=FCF₂₀₃₃ × (1 + g) ÷ (r – g) = USD 11 million × (1 + 2.1%) ÷ (6.1% – 2.1%) = USD 277 million

Present Value Final Value (PVTV)= television / (1 + r)¹⁰= USD 277 million ÷ ( 1 + 6.1%)¹⁰= $153 million

The total value is the sum of the next ten years of cash flows plus the discounted terminal value, giving a total equity value of $273 million in this case. To get the actual value per share, we divide it by the total number of shares outstanding. Compared to the current share price of C$13.7, the company appears slightly undervalued at a 23% discount to the current share price. However, remember that this is only a rough estimate and as with any complex design, garbage in, garbage out.

Important assumptions

The most important inputs to discounted cash flows are the discount rate and, of course, actual cash flows. Part of investing is making your own assessment of a company’s future performance, so try doing the math yourself and check your own assumptions. DCF also does not take into account the possible cyclicality of the industry or the company’s future capital requirements, so it does not provide a complete picture of the company’s potential performance. Given that we view Polaris Renewable Energy as a potential shareholder, the discount rate is the cost of equity capital rather than the cost of capital (or weighted average cost of capital, WACC), which takes into account debt. We used 6.1% in these calculations based on a leveraged beta of 0.872. Beta is a measure of a stock’s volatility compared to the market as a whole. We obtain our beta from the industry average beta of comparable companies around the world, with an imposed limit of 0.8 to 2.0, which is a reasonable range for a stable business.

SWOT Analysis for Polaris Renewable Energy

Next steps:

While company valuation is important, it is only one of many factors that need to be valued for a company. It is impossible to obtain a reliable valuation using the DCF model. It’s best to use different cases and assumptions and see how they affect the company’s valuation. For example, if the growth rate of the terminal value is adjusted slightly, it can dramatically change the overall result. What is the reason why the stock price is below intrinsic value? For Polaris Renewable Energy, we have prepared three more elements that are worth considering:

1. Risk: Take risks, for example – Polaris Renewable Energy does it 3 warning signs (and 2 that shouldn’t be ignored) we think you should know.
2. Management:Were insiders increasing their shares to take advantage of market sentiment regarding PIF’s future prospects? See our C-suite and C-suite analysis, including insights on CEO compensation and governance factors.
3. Other solid companies: Low debt, high rate of return on equity and good past performance are the basis of a strong business. We encourage you to check out our interactive stock list with solid business fundamentals to see if there are other stocks you may not have considered!

PS. Simply Wall St updates its DCF calculations for every Canadian stock daily, so if you want to know the intrinsic value of other stocks, simply search here.

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This article by Simply Wall St is of a general nature. We comment based on historical data and analyst forecasts, using only an unbiased methodology, and our articles are not intended to provide financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide long-term, focused analysis based on fundamental data. Please note that our analysis may not reflect the latest price-sensitive company announcements or qualitative content. Simply Wall St has no position in any of the stocks mentioned.