Key Insights

Using the 2 Stage Free Cash Flow to Equity, GDI Integrated Facility Services fair value estimate is CA$41.44 Current share price of CA$38.03 suggests GDI Integrated Facility Services is potentially trading close to its fair value Analyst price target for GDI is CA$51.00, which is 23% above our fair value estimate

Does the October share price for GDI Integrated Facility Services Inc. (TSE:GDI) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the forecast future cash flows of the company and discounting them back to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

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. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

Check out our latest analysis for GDI Integrated Facility Services

The Model

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 discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 Levered FCF (CA$, Millions)  CA$71.9m CA$65.1m CA$61.3m CA$59.2m CA$58.0m CA$57.6m CA$57.6m CA$57.9m CA$58.5m CA$59.2m Growth Rate Estimate Source Analyst x3 Analyst x2 Est @ -5.81% Est @ -3.51% Est @ -1.90% Est @ -0.77% Est @ 0.02% Est @ 0.57% Est @ 0.96% Est @ 1.23% Present Value (CA$, Millions) Discounted @ 7.3%  CA$67.0 CA$56.5 CA$49.6 CA$44.6 CA$40.8 CA$37.7 CA$35.1 CA$32.9 CA$31.0 CA$29.2

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CA$424m

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 1.9%. We discount the terminal cash flows to today's value at a cost of equity of 7.3%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = CA$59m× (1 + 1.9%) ÷ (7.3%– 1.9%) = CA$1.1b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CA$1.1b÷ ( 1 + 7.3%)10= CA$546m

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$970m. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of CA$38.0, the company appears about fair value at a 8.2% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent. dcf

The Assumptions

We would point out that 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 GDI Integrated Facility 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 7.3%, which is based on a levered beta of 1.091. 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 GDI Integrated Facility Services

Strength

No major strengths identified for GDI.

Weakness

Earnings declined over the past year.

Interest payments on debt are not well covered.

Opportunity

Annual earnings are forecast to grow faster than the Canadian market.

Current share price is below our estimate of fair value.

Threat

Debt is not well covered by operating cash flow.

Annual revenue is forecast to grow slower than the Canadian market.

Looking Ahead:

Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize 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 GDI Integrated Facility Services, there are three important elements you should consider:

Risks: Be aware that  GDI Integrated Facility Services is showing  2 warning signs in our investment analysis, and 1 of those is potentially serious... Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for GDI'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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the TSX every day. If you want to find the calculation for other stocks 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.