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Wheaton Precious Metals
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== Valuation == === Absolute === WPM is a multi-asset company that has shown a willingness and desire to buy streams in the past to maintain production and maximise shareholder returns. As a result, rather than its customary method of discounting maximum potential dividends over the life of operations back to FY22, in the case of WPM (as with Newmont and Endeavour), Edison Investment Research has introduced a new valuation methodology whereby Edison discounts forecast cash flows back over five years from the start of FY22 and then apply an ex-growth terminal multiple to forecast cash flows in that year (ie FY26) based on an appropriate discount rate. In this case, in the wake of Q122 results, Edison Investment Research's estimate of WPM’s ‘terminal’ pre-financing cash flow in FY26 is US$2.90/share, as shown below: '''Exhibit 14: WPM cash flow per share and related valuation (US$/share), FY22–26<ref>Source: Edison Investment Research. Note: Valuation line assumes ex-growth cash flow per share growth rate of 4.0% pa post-FY26 in nominal terms, which equals the average US rate of CPI inflation since 1972 (ie 0% per annum growth in real terms).</ref>''' [[File:Image7-d298671cda44634235f3a7062b9134d8.png|600x600px]] Assuming 4% growth in nominal cash flows beyond FY26 (ie 0% growth in real cash flows) and applying a discount rate of 9.0% (being the expected long-term required nominal equity return), Edison Investment Research's terminal valuation of the company at end-FY26 is US$59.98/share, or C$77.83/share, which, when discounted back to FY22 in combination with intervening cash flows, results in a valuation at the start of FY22 of US$43.49/share, or C$56.43/share. However, this valuation is inherently conservative in that it is based on the assumption of zero growth in (real) cash flows beyond FY26. This is inconsistent with the gold price, which has risen at a compound average annual growth rate of 7.6% per annum since 1968 and at a simple average annual growth rate of 9.7% per annum (as depicted below). '''Exhibit 15: Gold price annual performance, 1968–2021<ref>Source: Edison Investment Research (underlying data: US Bureau of Labor Statistics, Bloomberg, kitco.com, South African Chamber of Mines).</ref>''' [[File:Image8-d947fb235dee4c6a0c0725c4c75eb79d.png|600x600px]] It is also inconsistent with WPM’s history. Recently, WPM’s operational cash flow has increased at a compound average annual growth rate of 6.1% pa for the nine years between FY13 and FY22e, while its operational cash flow per share has increased at compound average annual growth rate of 3.4% pa over the same timeframe (NB Both above inflation over the same timeframe). Longer term, WPM’s operational cash flow has increased at a compound average annual growth rate of 23.2% pa for the sixteen years between FY05 and FY21, while its operational cash flow per share has increased at compound average annual growth rate of 15.8% pa. Applying these growth rates to future assumed performance, Edison's valuation varies as follows: {| class="wikitable" |+Exhibit 16: WPM valuation at different long-term cash flow growth rate assumptions<ref>Source: Edison Investment Research. Note: *As at 1 January 2022.</ref> !Assumption re long-term cash flow growth beyond FY26 !Valuation* (US$/share) !Valuation* (C$/share) |- |3.4% growth (WPM’s cash flow per share growth rate since FY13) |39.26 |50.94 |- |Base case (assumes 4% growth in nominal or 0% growth in real cash flow per share after FY26) |43.49 |56.43 |- |4.0% growth (average US CPI inflation rate 1972-2021) |43.49 |56.43 |- |6.1% growth (WPM’s cash flow growth rate since FY13) |73.36 |95.20 |- |7.6% growth (nominal gold price compound average annual growth rate pa since 1968) |149.16 |193.55 |} Stated alternatively, we can say that WPM’s current share price of C$49.54 discounts a long-term compound annual average growth rate in cash flows per share of 3.2%, which is lower even than the compound average annual increase in US consumer prices from 2013 to 2022 (as measured by the US CPI). === Historical === Excluding FY04 (part-year), WPM’s shares have historically traded on an average P/E multiple of 30.1x current year basic underlying EPS, excluding impairments (cf 27.1x Edison or 26.3x Refinitiv consensus FY22e – see Exhibit 17). '''Exhibit 17: WPM’s historical current year P/E multiples, 2005–21<ref>Source: Edison Investment Research.</ref>''' [[File:Image9-a92743c74c7dc30e74c82d745bb97cad.png|600x600px]] Applying this 30.1x multiple to Edison Investment Research's EPS forecast of US$2.06 in FY26 (previously US$1.84 in FY23) implies a potential value per share for WPM of US$62.02 or C$80.47 in that year. However, the graph above suggests that the investing environment post-2017 has been able to support an enhanced WPM multiple relative to earlier years. Edison Investment Research would ascribe this observation to macro-economic uncertainty and loose monetary policy combining to create a supportive environment for precious metals prices. As such, Edison believes that a multiple of 38.6x (the average of FY18, FY19, FY20 and FY21) may still be supported in the event of a return to favour of precious metals and precious metals stocks. In this case, applying a 38.6x earnings multiple to its updated EPS forecast of US$1.72 in FY23 implies a potential value per share for WPM in that year of US$66.34 or C$86.08. Even at such share price levels however, a multiple of 38.6x would still put WPM’s shares on little more than par relative to those of Franco-Nevada (see Exhibit 18, below). === Relative === In the meantime, from a relative perspective, it is notable that WPM is cheaper than its peers on 72% (26 out of 36) of the valuation measures observed in Exhibit 18 if Edison estimates are adopted or 61% (22 out of 36) of the same valuation measures if consensus forecasts are adopted. {| class="wikitable" |+Exhibit 18: WPM comparative valuation versus a sample of operating and royalty/streaming companies<ref>Source: Refinitiv, Edison Investment Research. Note: Peers priced on 23 June 2022. *Derived using Edison forecasts and average consensus multiples.</ref> ! ! colspan="3" |P/E (x) ! colspan="3" |Yield (%) ! colspan="3" |P/CF (x) |- ! !Year 1 !Year 2 !Year 3 !Year 1 !Year 2 !Year 3 !Year 1 !Year 2 !Year 3 |- |Royalty companies | | | | | | | | | |- |Franco-Nevada |35.7 |36.6 |36.7 |0.9 |0.9 |1.0 |25.9 |25.5 |26.2 |- |Royal Gold |27.8 |25.1 |25.6 |1.3 |1.3 |1.4 |16.2 |14.4 |14.8 |- |Sandstorm Gold |32.5 |31.9 |36.7 |0.0 |0.0 |0.0 |13.2 |13.2 |13.5 |- |Osisko |36.1 |26.2 |22.4 |1.5 |1.5 |1.5 |16.3 |13.2 |12.5 |- |Average |33.0 |28.5 |29.6 |0.9 |0.9 |1.0 |17.9 |16.6 |16.7 |- |WPM (Edison forecasts) |27.1 |22.2 |22.8 |1.6 |1.8 |1.9 |18.9 |15.6 |15.5 |- |WPM (consensus) |26.3 |25.8 |26.7 |1.5 |1.6 |1.2 |18.5 |17.6 |17.6 |- |Implied WPM share price (US$)* |46.54 |49.03 |49.67 |66.46 |74.59 |76.96 |36.24 |40.42 |41.12 |} Within this context, it is worth noting that Edison forecasts imply that WPM’s EPS, DPS and cash flow will increase in FY23 and FY24 (relative to FY22), not least under the influence of the company’s increasing production profile (see Exhibit 9). By contrast, consensus forecasts appear to indicate that the market expects WPM’s EPS and cash flow to be broadly unchanged in FY23 and FY24 relative to FY22, implying that it is either not expecting any production/sales increase, or that it is anticipating the degree of any production/sales increase to be offset by an approximately equal and opposite move in precious metals prices. The consensus also appears to indicate that it believes that WPM’s dividend will remain approximately flat in FY23, before being cut in FY24.
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