Do investors undervalue Repay Holdings Corporation (NASDAQ: RPAY) by 37%?
In this article, we’ll estimate the intrinsic value of Repay Holdings Corporation (NASDAQ: RPAY) by estimating the company’s future cash flows and discounting them to their present value. To this end, we will take advantage of the Discounted Cash Flow (DCF) model. Patterns like these may seem beyond a layman’s comprehension, but they are fairly easy to follow.
Remember, however, that there are many ways to estimate the value of a business, and a DCF is just one method. If you would like to know more about discounted cash flow, the rationale for this calculation can be read in detail in the Simply Wall St.
See our latest analysis for Repay Holdings
Is Repay Holdings’ Value Fair?
We use the 2-step growth model, which simply means that we take into account two stages of business growth. During the initial period, the business can have a higher growth rate and the second stage is usually assumed to have a stable growth rate. In the first step, we need to estimate the cash flow of the business over the next ten years. Where possible, we use analyst estimates, but when these are not available, we extrapolate the previous free cash flow (FCF) from the last estimate or stated value. We assume that companies with decreasing free cash flow will slow their rate of contraction, and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow down more in the early years than in subsequent years.
Generally, we assume that a dollar today is worth more than a dollar in the future, and so the sum of these future cash flows is then discounted to today’s value:
10-year free cash flow (FCF) forecast
|Leverage FCF ($, Millions)||US $ 106.1 million||US $ 133.5 million||154.0 million US dollars||$ 171.4 million||US $ 186.0 million||US $ 198.2 million||208.4 million US dollars||US $ 217.2 million||US $ 224.9 million||US $ 231.8 million|
|Source of growth rate estimate||Analyst x2||Analyst x2||Est @ 15.33%||Est @ 11.32%||Est @ 8.51%||East @ 6.55%||Est @ 5.17%||Is 4.21%||Is @ 3.53%||East @ 3.06%|
|Present value (in millions of dollars) discounted at 7.1%||US $ 99.0||116 USD||125 USD||130 USD||132 USD||US $ 131||US $ 129||125 USD||US $ 121||116 USD|
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = US $ 1.2 billion
We now need to calculate the Terminal Value, which takes into account all future cash flows after this ten year period. The Gordon growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.0%. We discount the terminal cash flows to their present value at a cost of equity of 7.1%.
Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = US $ 232 million × (1 + 2.0%) ÷ (7.1% to 2.0%) = US $ 4.6 billion
Present value of terminal value (PVTV)= TV / (1 + r)ten= 4.6 billion US dollars ÷ (1 + 7.1%)ten= US $ 2.3 billion
Total value, or net worth, is then the sum of the present value of future cash flows, which in this case is $ 3.5 billion. To get the intrinsic value per share, we divide it by the total number of shares outstanding. From the current share price of US $ 23.0, the company appears to be quite undervalued with a 37% discount from the current share price. Remember, however, that this is only a rough estimate, and like any complex formula – trash in, trash out.
We would like to stress that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. You don’t have to agree with these entries, I recommend that you redo the calculations yourself and play with them. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a full picture of a company’s potential performance. Since we view Repay Holdings 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 takes into account debt. In this calculation, we used 7.1%, which is based on a leveraged beta of 1.181. Beta is a measure of the volatility of a stock relative to the market as a whole. We get our average beta from the industry beta of comparable companies globally, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
Valuation is only one side of the coin in terms of building your investment thesis, and it’s just one of the many factors you need to evaluate for a business. DCF models are not the alpha and omega of investment valuation. Preferably, you would apply different cases and assumptions and see their impact on the valuation of the business. For example, if the terminal value growth rate is adjusted slightly, it can dramatically change the overall result. Can we understand why the company trades at a discount to its intrinsic value? For Repay Holdings, there are three relevant things you should research further:
- Risks: For example, we have identified 2 warning signs for Repay Holdings that you need to be aware of.
- Future benefits: How does RPAY’s growth rate compare to that of its peers and the broader market? Dig deeper into the analyst consensus count for years to come by interacting with our free analyst growth expectations chart.
- Other high quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality stocks to get a feel for what you might be missing!
PS. Simply Wall St updates its DCF calculation for every US stock every day, so if you want to find the intrinsic value of any other stock just search here.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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