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A Look At The Fair Value Of PaySauce Limited (NZSE:PYS)

Key Insights

  • PaySauce's estimated fair value is NZ$0.21 based on 2 Stage Free Cash Flow to Equity

  • With NZ$0.24 share price, PaySauce appears to be trading close to its estimated fair value

  • The average discount for PaySauce's competitorsis currently 22%

Today we will run through one way of estimating the intrinsic value of PaySauce Limited (NZSE:PYS) by taking the expected future cash flows and discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

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.

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View our latest analysis for PaySauce

Is PaySauce Fairly Valued?

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. 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, 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 (NZ$, Millions)

NZ$1.87m

NZ$1.67m

NZ$1.56m

NZ$1.49m

NZ$1.46m

NZ$1.45m

NZ$1.46m

NZ$1.47m

NZ$1.49m

NZ$1.51m

Growth Rate Estimate Source

Est @ -16.31%

Est @ -10.69%

Est @ -6.75%

Est @ -4.00%

Est @ -2.07%

Est @ -0.72%

Est @ 0.23%

Est @ 0.89%

Est @ 1.35%

Est @ 1.67%

Present Value (NZ$, Millions) Discounted @ 6.9%

NZ$1.7

NZ$1.5

NZ$1.3

NZ$1.1

NZ$1.0

NZ$1.0

NZ$0.9

NZ$0.9

NZ$0.8

NZ$0.8

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = NZ$11m

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 2.4%. We discount the terminal cash flows to today's value at a cost of equity of 6.9%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = NZ$1.5m× (1 + 2.4%) ÷ (6.9%– 2.4%) = NZ$35m

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= NZ$35m÷ ( 1 + 6.9%)10= NZ$18m

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is NZ$29m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of NZ$0.2, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf
NZSE:PYS Discounted Cash Flow December 20th 2023

Important Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 PaySauce 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 6.9%, which is based on a levered beta of 0.894. 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 PaySauce

Strength

  • Debt is not viewed as a risk.

Weakness

  • Current share price is above our estimate of fair value.

Opportunity

  • Has sufficient cash runway for more than 3 years based on current free cash flows.

  • Lack of analyst coverage makes it difficult to determine PYS' earnings prospects.

Threat

  • No apparent threats visible for PYS.

Next Steps:

Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. 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 PaySauce, there are three fundamental items you should explore:

  1. Risks: For instance, we've identified 3 warning signs for PaySauce (1 is concerning) you should be aware of.

  2. 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!

  3. Other Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NZSE every day. If you want to find the calculation for other stocks just search here.

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

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.