The projected fair value for Bridgemarq Real Estate Services is CA$11.35 based on 2 Stage Free Cash Flow to Equity
With CA$13.06 share price, Bridgemarq Real Estate Services appears to be trading close to its estimated fair value
When compared to theindustry average discount of -51%, Bridgemarq Real Estate Services' competitors seem to be trading at a greater premium to fair value
In this article we are going to estimate the intrinsic value of Bridgemarq Real Estate Services Inc. (TSE:BRE) by taking the forecast future cash flows of the company and discounting them back to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. In the first stage we need to estimate the cash flows to the business over the next ten years. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) estimate
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF (CA$, Millions)
CA$11.3m
CA$10.9m
CA$10.7m
CA$10.6m
CA$10.6m
CA$10.7m
CA$10.8m
CA$10.9m
CA$11.1m
CA$11.3m
Growth Rate Estimate Source
Est @ -6.56%
Est @ -3.93%
Est @ -2.10%
Est @ -0.82%
Est @ 0.08%
Est @ 0.71%
Est @ 1.15%
Est @ 1.46%
Est @ 1.68%
Est @ 1.83%
Present Value (CA$, Millions) Discounted @ 7.5%
CA$10.5
CA$9.4
CA$8.6
CA$7.9
CA$7.4
CA$6.9
CA$6.5
CA$6.1
CA$5.8
CA$5.5
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = CA$74m
After calculating the present value of 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. 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 2.2%. We discount the terminal cash flows to today's value at a cost of equity of 7.5%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CA$215m÷ ( 1 + 7.5%)10= CA$104m
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$179m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of CA$13.1, the company appears around fair value at the time of writing. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.
dcf
Important Assumptions
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the 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 Bridgemarq Real Estate Services 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 7.5%, which is based on a levered beta of 1.303. 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.
SWOT Analysis for Bridgemarq Real Estate Services
Strength
Dividend is in the top 25% of dividend payers in the market.
Weakness
Earnings declined over the past year.
Interest payments on debt are not well covered.
Current share price is above our estimate of fair value.
Shareholders have been diluted in the past year.
Opportunity
BRE's financial characteristics indicate limited near-term opportunities for shareholders.
Lack of analyst coverage makes it difficult to determine BRE's earnings prospects.
Threat
Debt is not well covered by operating cash flow.
Total liabilities exceed total assets, which raises the risk of financial distress.
Dividends are not covered by earnings and cashflows.
Looking Ahead:
Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For Bridgemarq Real Estate Services, we've put together three additional elements you should further research:
Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for BRE's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
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.
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