Having said this and as we don’t have a lot of information, we might just want to estimate some kind of internal rate of return (IRR) for Sylvamo based on the terminal value of a discounted cash flow and the current share price. As we don´t have a weighted average cost of capital, I will just adjust the formula to calculate the implied internal rate of return at the current market price.
Internal rate of return:
Looking at sales and free cash flow it seems like 2021 will be better than 2020 (more movement of people, return to offices, etc). So I think it would be fair to take 364 and assume that will be this years free cash flow.
Considering the possibility that paper will be used even less in subsequent years due to the digitisation of the economy and society being more aware of sustainability impacts, I think the assumption that free cash flows are going to fall long term, makes sense. The question is, how much? 1% a year? 5%?
It’s not going to happen overnight, but the exact percentage might be hard to pinpoint. It is also worth keeping in mind that even during a year in which lots of their markets world-wide were in lockdown for probably around half the year, they still made a significant free cash flow of 284 million USD.
So, for the purpose of this back of the envelope calculation, I will assume a 5% decline, but not from the first year but from subsequent years onwards (hence I will only apply to the denominator in the fraction, not numerator).
Also, I think that from the terminal value we should subtract part of the debt of the company. It seems to be 1520 million (m) USD, however the company is also likely to have some assets sot we can probably assume that their tangible assets will cover a significant part of their debt and that we only need to take care of about half of it. So, for the purpose of subtracting debt to the equation I will use half of 1520, which is 760m USD.
I’d really like to see their annual statements for 2020 and the first half of 2021, I think that would make things clearer.
Current market capitalisation is 26.61 USD per share (according to the price for yesterday’s close - 08/10/2021 - on T212) x 44.1m shares = 1174m USD.
So, the equation now is:
Where debt is the debt considered to not be covered easily by their own assets (assumed to be half of total debt), the investment is the market capitalisation and the growth is the negative 5% (-0.05 in the equation).
Putting the numbers in and trying out for different values of “IRR”, we find that the IRR is nearly 14% (13.8%):
If we consider that the actual returns of the market long term is under 10% (depending which market you look it it can be much lower than 10% long-term, more like 3-7%) then it would seem like a reasonable IRR.
Obviously there are lots of assumptions in this and we are lacking data and assuming a lot, but I thought I’d share this rough calculation in case anyone else wants to comment.
If there is anything wrong with my methodology, please let me know.
Note: The calculation does not end in zero, it ends in around 2m, but that was the closest I could get to zero for a 3 digit number. Considering how rough this equation is and the very large assumptions, going anything beyond a 2 digit number (eg. 14%) is probably meaningless.
Obviously none of this is investment advice. This is just to comment on ideas and spark conversation .