Southern Energy Corp. (CVE:SOU) Shares Could Be 47% Below Their Intrinsic Value Estimate

In This Article:

Key Insights

  • Southern Energy's estimated fair value is CA$0.32 based on 2 Stage Free Cash Flow to Equity

  • Current share price of CA$0.17 suggests Southern Energy is potentially 47% undervalued

  • When compared to theindustry average discount to fair value of 22%, Southern Energy's competitors seem to be trading at a lesser discount

How far off is Southern Energy Corp. (CVE:SOU) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by projecting its future cash flows and then discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

Check out our latest analysis for Southern Energy

Step By Step Through The Calculation

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. 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, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) forecast

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

Levered FCF ($, Millions)

-US$16.1m

-US$16.7m

US$3.99m

US$4.98m

US$5.73m

US$6.36m

US$6.89m

US$7.33m

US$7.70m

US$8.03m

Growth Rate Estimate Source

Analyst x2

Analyst x2

Analyst x1

Analyst x1

Est @ 14.92%

Est @ 11.04%

Est @ 8.33%

Est @ 6.42%

Est @ 5.09%

Est @ 4.16%

Present Value ($, Millions) Discounted @ 9.9%

-US$14.6

-US$13.8

US$3.0

US$3.4

US$3.6

US$3.6

US$3.6

US$3.4

US$3.3

US$3.1

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = -US$1.5m