Does the October share price for Brookfield Renewable Corporation (TSE:BEPC) reflect what it’s really worth? Today, we will estimate the stock’s intrinsic value by estimating the company’s future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model on this occasion. Believe it or not, it’s not too difficult to follow, as you’ll see from our example!
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
Check out our latest analysis for Brookfield Renewable
The model
We’re using the 2stage 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 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, so we discount the value of these future cash flows to their estimated value in today’s dollars:
10year free cash flow (FCF) forecast
2021 
2022 
2023 
2024 
2025 
2026 
2027 
2028 
2029 
2030 

Levered FCF ($, Millions) 
US$687.9m 
US$713.5m 
US$735.7m 
US$755.3m 
US$773.2m 
US$789.9m 
US$805.7m 
US$821.1m 
US$836.1m 
US$851.0m 
Growth Rate Estimate Source 
Est @ 4.61% 
Est @ 3.72% 
Est @ 3.1% 
Est @ 2.67% 
Est @ 2.37% 
Est @ 2.16% 
Est @ 2.01% 
Est @ 1.9% 
Est @ 1.83% 
Est @ 1.78% 
Present Value ($, Millions) Discounted @ 6.5% 
US$646 
US$629 
US$610 
US$588 
US$565 
US$542 
US$520 
US$497 
US$476 
US$455 
(“Est” = FCF growth rate estimated by Simply Wall St)
Present Value of 10year Cash Flow (PVCF) = US$5.5b
We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country’s GDP growth. In this case we have used the 5year average of the 10year government bond yield (1.7%) to estimate future growth. In the same way as with the 10year ‘growth’ period, we discount future cash flows to today’s value, using a cost of equity of 6.5%.
Terminal Value (TV)= FCF_{2030} × (1 + g) ÷ (r – g) = US$851m× (1 + 1.7%) ÷ (6.5%– 1.7%) = US$18b
Present Value of Terminal Value (PVTV)= TV / (1 + r)^{10}= US$18b÷ ( 1 + 6.5%)^{10}= US$9.6b
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 US$15b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of CA$84.8, the company appears around fair value at the time of writing. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.
Important assumptions
We would point out 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 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 Brookfield Renewable 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 6.5%, which is based on a levered beta of 0.800. 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.
Moving On:
Whilst important, the DCF calculation shouldn’t be the only metric you look at when researching 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. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Brookfield Renewable, there are three additional items you should consider:

Risks: To that end, you should learn about the 3 warning signs we’ve spotted with Brookfield Renewable (including 1 which is concerning) .

Future Earnings: How does BEPC’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.

Other High Quality Alternatives: Do you like a good allrounder? 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.
This article by Simply Wall St is general in nature. 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 longterm focused analysis driven by fundamental data. Note that our analysis may not factor in the latest pricesensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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