Intrinsic value of Freehold Royalties Ltd. - FRU

Previous Close

$14.35

  Intrinsic Value

$1.88

stock screener

  Rating & Target

str. sell

-87%

Previous close

$14.35

 
Intrinsic value

$1.88

 
Up/down potential

-87%

 
Rating

str. sell

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of FRU stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 1.7

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  -3.01
  18.80
  17.42
  16.18
  15.06
  14.05
  13.15
  12.33
  11.60
  10.94
  10.35
  9.81
  9.33
  8.90
  8.51
  8.16
  7.84
  7.56
  7.30
  7.07
  6.86
  6.68
  6.51
  6.36
  6.22
  6.10
  5.99
  5.89
  5.80
  5.72
  5.65
Revenue, $m
  129
  153
  180
  209
  241
  274
  310
  349
  389
  432
  476
  523
  572
  623
  676
  731
  788
  848
  910
  974
  1,041
  1,110
  1,183
  1,258
  1,336
  1,418
  1,503
  1,591
  1,684
  1,780
  1,881
Variable operating expenses, $m
 
  165
  194
  225
  259
  296
  335
  376
  420
  465
  514
  564
  617
  671
  729
  788
  850
  914
  981
  1,050
  1,122
  1,197
  1,275
  1,356
  1,441
  1,528
  1,620
  1,715
  1,815
  1,919
  2,027
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  138
  165
  194
  225
  259
  296
  335
  376
  420
  465
  514
  564
  617
  671
  729
  788
  850
  914
  981
  1,050
  1,122
  1,197
  1,275
  1,356
  1,441
  1,528
  1,620
  1,715
  1,815
  1,919
  2,027
Operating income, $m
  -10
  -12
  -14
  -16
  -19
  -21
  -24
  -27
  -30
  -34
  -37
  -41
  -45
  -49
  -53
  -57
  -61
  -66
  -71
  -76
  -81
  -87
  -92
  -98
  -104
  -111
  -117
  -124
  -131
  -139
  -147
EBITDA, $m
  94
  111
  130
  151
  174
  199
  225
  252
  282
  313
  345
  379
  414
  451
  489
  529
  571
  614
  659
  705
  754
  804
  856
  911
  967
  1,026
  1,088
  1,152
  1,219
  1,289
  1,361
Interest expense (income), $m
  4
  3
  4
  5
  6
  7
  8
  9
  10
  12
  13
  14
  16
  18
  19
  21
  23
  25
  27
  29
  31
  33
  35
  38
  40
  43
  46
  48
  51
  54
  58
Earnings before tax, $m
  -14
  -15
  -18
  -21
  -24
  -28
  -32
  -36
  -41
  -45
  -50
  -55
  -61
  -66
  -72
  -78
  -84
  -91
  -98
  -105
  -112
  -120
  -128
  -136
  -145
  -153
  -163
  -173
  -183
  -193
  -204
Tax expense, $m
  -3
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Net income, $m
  -11
  -15
  -18
  -21
  -24
  -28
  -32
  -36
  -41
  -45
  -50
  -55
  -61
  -66
  -72
  -78
  -84
  -91
  -98
  -105
  -112
  -120
  -128
  -136
  -145
  -153
  -163
  -173
  -183
  -193
  -204

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  1
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  1,007
  1,197
  1,406
  1,633
  1,879
  2,143
  2,425
  2,724
  3,040
  3,373
  3,722
  4,087
  4,469
  4,866
  5,280
  5,711
  6,159
  6,624
  7,108
  7,610
  8,133
  8,676
  9,241
  9,828
  10,440
  11,077
  11,740
  12,432
  13,153
  13,906
  14,692
Adjusted assets (=assets-cash), $m
  1,006
  1,197
  1,406
  1,633
  1,879
  2,143
  2,425
  2,724
  3,040
  3,373
  3,722
  4,087
  4,469
  4,866
  5,280
  5,711
  6,159
  6,624
  7,108
  7,610
  8,133
  8,676
  9,241
  9,828
  10,440
  11,077
  11,740
  12,432
  13,153
  13,906
  14,692
Revenue / Adjusted assets
  0.128
  0.128
  0.128
  0.128
  0.128
  0.128
  0.128
  0.128
  0.128
  0.128
  0.128
  0.128
  0.128
  0.128
  0.128
  0.128
  0.128
  0.128
  0.128
  0.128
  0.128
  0.128
  0.128
  0.128
  0.128
  0.128
  0.128
  0.128
  0.128
  0.128
  0.128
Average production assets, $m
  869
  1,032
  1,212
  1,408
  1,620
  1,848
  2,091
  2,349
  2,621
  2,908
  3,209
  3,524
  3,853
  4,196
  4,553
  4,924
  5,310
  5,711
  6,128
  6,562
  7,012
  7,480
  7,967
  8,474
  9,001
  9,550
  10,123
  10,719
  11,341
  11,990
  12,667
Working capital, $m
  11
  12
  14
  16
  19
  21
  24
  27
  30
  34
  37
  41
  45
  49
  53
  57
  61
  66
  71
  76
  81
  87
  92
  98
  104
  111
  117
  124
  131
  139
  147
Total debt, $m
  84
  107
  132
  160
  189
  221
  255
  292
  330
  370
  412
  457
  503
  551
  601
  653
  707
  764
  822
  883
  946
  1,012
  1,080
  1,151
  1,225
  1,302
  1,383
  1,466
  1,554
  1,645
  1,740
Total liabilities, $m
  123
  145
  170
  198
  227
  259
  293
  330
  368
  408
  450
  495
  541
  589
  639
  691
  745
  802
  860
  921
  984
  1,050
  1,118
  1,189
  1,263
  1,340
  1,421
  1,504
  1,592
  1,683
  1,778
Total equity, $m
  885
  1,052
  1,236
  1,436
  1,652
  1,884
  2,132
  2,395
  2,672
  2,965
  3,272
  3,593
  3,928
  4,277
  4,641
  5,020
  5,413
  5,823
  6,248
  6,689
  7,149
  7,626
  8,122
  8,639
  9,177
  9,736
  10,320
  10,928
  11,562
  12,223
  12,914
Total liabilities and equity, $m
  1,008
  1,197
  1,406
  1,634
  1,879
  2,143
  2,425
  2,725
  3,040
  3,373
  3,722
  4,088
  4,469
  4,866
  5,280
  5,711
  6,158
  6,625
  7,108
  7,610
  8,133
  8,676
  9,240
  9,828
  10,440
  11,076
  11,741
  12,432
  13,154
  13,906
  14,692
Debt-to-equity ratio
  0.095
  0.100
  0.110
  0.110
  0.110
  0.120
  0.120
  0.120
  0.120
  0.120
  0.130
  0.130
  0.130
  0.130
  0.130
  0.130
  0.130
  0.130
  0.130
  0.130
  0.130
  0.130
  0.130
  0.130
  0.130
  0.130
  0.130
  0.130
  0.130
  0.130
  0.130
Adjusted equity ratio
  0.879
  0.879
  0.879
  0.879
  0.879
  0.879
  0.879
  0.879
  0.879
  0.879
  0.879
  0.879
  0.879
  0.879
  0.879
  0.879
  0.879
  0.879
  0.879
  0.879
  0.879
  0.879
  0.879
  0.879
  0.879
  0.879
  0.879
  0.879
  0.879
  0.879
  0.879

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  -11
  -15
  -18
  -21
  -24
  -28
  -32
  -36
  -41
  -45
  -50
  -55
  -61
  -66
  -72
  -78
  -84
  -91
  -98
  -105
  -112
  -120
  -128
  -136
  -145
  -153
  -163
  -173
  -183
  -193
  -204
Depreciation, amort., depletion, $m
  104
  123
  144
  168
  193
  220
  249
  280
  312
  346
  382
  420
  459
  499
  542
  586
  632
  680
  730
  781
  835
  891
  948
  1,009
  1,072
  1,137
  1,205
  1,276
  1,350
  1,427
  1,508
Funds from operations, $m
  92
  108
  127
  147
  169
  192
  217
  243
  272
  301
  332
  364
  398
  433
  470
  508
  548
  589
  632
  676
  723
  771
  821
  873
  927
  983
  1,042
  1,104
  1,167
  1,234
  1,304
Change in working capital, $m
  -1
  2
  2
  2
  2
  3
  3
  3
  3
  3
  3
  4
  4
  4
  4
  4
  4
  5
  5
  5
  5
  5
  6
  6
  6
  6
  7
  7
  7
  8
  8
Cash from operations, $m
  93
  106
  124
  144
  166
  189
  214
  241
  268
  298
  328
  361
  394
  429
  466
  504
  543
  584
  627
  671
  717
  765
  815
  867
  921
  977
  1,036
  1,097
  1,160
  1,227
  1,296
Maintenance CAPEX, $m
  0
  -103
  -123
  -144
  -168
  -193
  -220
  -249
  -280
  -312
  -346
  -382
  -420
  -459
  -499
  -542
  -586
  -632
  -680
  -730
  -781
  -835
  -891
  -948
  -1,009
  -1,072
  -1,137
  -1,205
  -1,276
  -1,350
  -1,427
New CAPEX, $m
  -5
  -163
  -180
  -196
  -212
  -228
  -243
  -258
  -272
  -287
  -301
  -315
  -329
  -343
  -357
  -371
  -386
  -401
  -417
  -433
  -450
  -468
  -487
  -507
  -527
  -549
  -572
  -596
  -622
  -649
  -677
Cash from investing activities, $m
  -170
  -266
  -303
  -340
  -380
  -421
  -463
  -507
  -552
  -599
  -647
  -697
  -749
  -802
  -856
  -913
  -972
  -1,033
  -1,097
  -1,163
  -1,231
  -1,303
  -1,378
  -1,455
  -1,536
  -1,621
  -1,709
  -1,801
  -1,898
  -1,999
  -2,104
Free cash flow, $m
  -77
  -161
  -178
  -196
  -214
  -231
  -249
  -266
  -284
  -301
  -319
  -336
  -354
  -372
  -391
  -409
  -429
  -449
  -470
  -492
  -514
  -538
  -562
  -588
  -615
  -644
  -673
  -705
  -738
  -772
  -809
Issuance/(repayment) of debt, $m
  -68
  23
  25
  28
  30
  32
  34
  36
  38
  40
  42
  44
  46
  48
  50
  52
  54
  56
  59
  61
  63
  66
  68
  71
  74
  77
  80
  84
  87
  91
  95
Issuance/(repurchase) of shares, $m
  202
  183
  201
  221
  241
  260
  280
  299
  318
  338
  357
  376
  396
  416
  436
  457
  478
  500
  523
  547
  571
  597
  624
  652
  682
  713
  746
  781
  817
  855
  895
Cash from financing (excl. dividends), $m  
  134
  206
  226
  249
  271
  292
  314
  335
  356
  378
  399
  420
  442
  464
  486
  509
  532
  556
  582
  608
  634
  663
  692
  723
  756
  790
  826
  865
  904
  946
  990
Total cash flow (excl. dividends), $m
  57
  46
  48
  52
  57
  61
  65
  69
  73
  77
  80
  84
  88
  92
  95
  99
  103
  107
  111
  116
  120
  125
  130
  135
  141
  147
  153
  159
  166
  173
  181
Retained Cash Flow (-), $m
  -142
  -183
  -201
  -221
  -241
  -260
  -280
  -299
  -318
  -338
  -357
  -376
  -396
  -416
  -436
  -457
  -478
  -500
  -523
  -547
  -571
  -597
  -624
  -652
  -682
  -713
  -746
  -781
  -817
  -855
  -895
Prev. year cash balance distribution, $m
 
  1
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  -137
  -153
  -168
  -184
  -199
  -215
  -230
  -246
  -261
  -276
  -292
  -308
  -324
  -340
  -357
  -375
  -393
  -411
  -431
  -451
  -472
  -494
  -517
  -541
  -567
  -593
  -621
  -650
  -681
  -714
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  -131
  -140
  -147
  -151
  -154
  -156
  -155
  -153
  -150
  -145
  -139
  -131
  -123
  -114
  -105
  -95
  -85
  -76
  -66
  -57
  -49
  -41
  -34
  -28
  -22
  -17
  -13
  -10
  -7
  -5
Current shareholders' claim on cash, %
  100
  90.2
  82.0
  75.0
  69.0
  63.7
  59.1
  55.1
  51.5
  48.3
  45.5
  42.9
  40.5
  38.4
  36.5
  34.7
  33.0
  31.5
  30.1
  28.8
  27.6
  26.4
  25.3
  24.3
  23.3
  22.4
  21.6
  20.7
  20.0
  19.2
  18.5

Freehold Royalties Ltd. is a Canada-based company engaged in the development and production of oil and natural gas, predominantly in western Canada. The Company's primary focus is acquiring and managing oil and natural gas royalties. The Company manages a non-government portfolio of oil and natural gas royalties in Canada. The Company's total land holdings encompass approximately 3.7 million gross acres, over 90% of which are royalties. Of this, its mineral title lands (including royalty assumption lands), which it owns in perpetuity, cover approximately 750,000 acres. It also has interests in over 36,000 wells (of which over 34,000 are royalty wells, including over 18,000 unitized wells). The Company has approximately 300,000 gross undeveloped acres. In addition, it has gross overriding royalty interests in over 2.5 million acres. The Company has drilled and completed a total of over 5,290 wells within the Western Canadian Sedimentary Basin.

FINANCIAL RATIOS  of  Freehold Royalties Ltd. (FRU)

Valuation Ratios
P/E Ratio -153.8
Price to Sales 13.1
Price to Book 1.9
Price to Tangible Book
Price to Cash Flow 18.2
Price to Free Cash Flow 19.2
Growth Rates
Sales Growth Rate -3%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -77.3%
Cap. Spend. - 3 Yr. Gr. Rate -29.6%
Financial Strength
Quick Ratio NaN
Current Ratio 0
LT Debt to Equity 9.5%
Total Debt to Equity 9.5%
Interest Coverage -3
Management Effectiveness
Return On Assets -0.8%
Ret/ On Assets - 3 Yr. Avg. 3.9%
Return On Total Capital -1.2%
Ret/ On T. Cap. - 3 Yr. Avg. 4.3%
Return On Equity -1.4%
Return On Equity - 3 Yr. Avg. 5.5%
Asset Turnover 0.1
Profitability Ratios
Gross Margin 86%
Gross Margin - 3 Yr. Avg. 87.6%
EBITDA Margin 72.9%
EBITDA Margin - 3 Yr. Avg. 73.5%
Operating Margin -7%
Oper. Margin - 3 Yr. Avg. 11.1%
Pre-Tax Margin -10.9%
Pre-Tax Margin - 3 Yr. Avg. 7.7%
Net Profit Margin -8.5%
Net Profit Margin - 3 Yr. Avg. 7.5%
Effective Tax Rate 21.4%
Eff/ Tax Rate - 3 Yr. Avg. 40.8%
Payout Ratio -518.2%

FRU stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the FRU stock intrinsic value calculation we used $129 million for the last fiscal year's total revenue generated by Freehold Royalties Ltd.. The default revenue input number comes from 2016 income statement of Freehold Royalties Ltd.. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our FRU stock valuation model: a) initial revenue growth rate of 18.8% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for FRU is calculated based on our internal credit rating of Freehold Royalties Ltd., is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Freehold Royalties Ltd..
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of FRU stock the variable cost ratio is equal to 107.8%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for FRU stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for Freehold Royalties Ltd..

Corporate tax rate of 27% is the nominal tax rate for Freehold Royalties Ltd.. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the FRU stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for FRU are equal to 673.6%.

Life of production assets of 8.4 years is the average useful life of capital assets used in Freehold Royalties Ltd. operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for FRU is equal to 7.8%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $885 million for Freehold Royalties Ltd. - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 117.945 million for Freehold Royalties Ltd. is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Freehold Royalties Ltd. at the current share price and the inputted number of shares is $1.7 billion.

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Financial statements of FRU
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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