Using the 2 Stage Free Cash Flow to Equity, New Zealand Energy fair value estimate is CA$0.28
With CA$0.31 share price, New Zealand Energy appears to be trading close to its estimated fair value
How far off is New Zealand Energy Corp. (CVE:NZ) from its intrinsic value? Using the most recent financial data, we’ll take a look at whether the stock is fairly priced by projecting its future cash flows and then discounting them to today’s value. This will be done using the Discounted Cash Flow (DCF) model. Believe it or not, it’s not too difficult to follow, as you’ll see from our example!
Remember though, that there are many ways to estimate a company’s value, and a DCF is just one method. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.
We’re using the 2-stage growth model, which simply means we take in account two stages of company’s growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren’t available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
Levered FCF (CA$, Millions)
CA$69.1m
-CA$1.39m
-CA$1.39m
-CA$1.75m
-CA$2.06m
-CA$2.29m
-CA$2.46m
-CA$2.57m
-CA$2.63m
-CA$2.65m
Growth Rate Estimate Source
Analyst x1
Analyst x1
Analyst x1
Est @ -26.18%
Est @ -17.54%
Est @ -11.50%
Est @ -7.27%
Est @ -4.31%
Est @ -2.24%
Est @ -0.79%
Present Value (CA$, Millions) Discounted @ 6.2%
CA$65.1
-CA$1.2
-CA$1.2
-CA$1.4
-CA$1.5
-CA$1.6
-CA$1.6
-CA$1.6
-CA$1.5
-CA$1.4
(“Est” = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CA$52m
Story Continues
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 2.6%. We discount the terminal cash flows to today’s value at a cost of equity of 6.2%.
Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = -CA$2.6m× (1 + 2.6%) ÷ (6.2%– 2.6%) = -CA$75m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= -CA$75m÷ ( 1 + 6.2%)10= -CA$41m
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 CA$11m. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of CA$0.3, 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.
TSXV:NZ Discounted Cash Flow October 3rd 2025
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. Part of investing is coming up with your own evaluation of a company’s future performance, so try the calculation yourself and check your own 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 New Zealand Energy 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 6.2%, which is based on a levered beta of 0.856. 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.
View our latest analysis for New Zealand Energy
Strength
Weakness
Opportunity
Threat
Although the valuation of a company is important, it ideally won’t be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. Preferably you’d apply different cases and assumptions and see how they would impact the company’s valuation. 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 New Zealand Energy, we’ve compiled three additional factors you should explore:
Risks: Consider for instance, the ever-present spectre of investment risk. We’ve identified 5 warning signs with New Zealand Energy , and understanding these should be part of your investment process.
Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for NZ’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
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.