DCF Studio

    H.TO · TOR · Utilities

    Hydro One Limited

    Also onConsensus Drift

    Implied value per share

    CAD 52.38

    Market price

    CAD 51.90

    Implied upside

    +0.9%

    5-year forecast · Perpetuity growth terminal value · Mid-year discounting · Base case

    AdjustedCapital expenditure runs at 31.3% of revenue against depreciation of 10.6%. A perpetuity has to be a steady state, so the terminal year uses maintenance capex at depreciation and then charges the reinvestment terminal growth requires (g/ROIC of NOPAT). The bridge is shown under Terminal Value.
    NoteRisk-free rate is an assumption: CAD assumption - no free live source available for this market.

    Value Per Share

    Perpetuity growth
    CAD 52.38+0.9%
    Exit multiple
    CAD 54.66+5.3%
    Market price
    CAD 51.90

    Same forecast, different terminal treatment. Percentages vs price.

    Forecast Cashflows

    Reporting currency (CAD). Outflows negative.

    0m195m390mFY26FY27FY28FY29FY30
    Nominal FCFFDiscounted to todayCAD
    LineFY26FY27FY28FY29FY30CAGR
    RevenueCAD 9.5bnCAD 10.0bnCAD 10.5bnCAD 11.0bnCAD 11.6bn+5.1%
    EBITCAD 2.4bnCAD 2.6bnCAD 2.7bnCAD 2.8bnCAD 3.0bn+5.1%
    NOPATCAD 2.1bnCAD 2.2bnCAD 2.3bnCAD 2.4bnCAD 2.6bn+5.1%
    Add depreciation & amortisationCAD 1.0bnCAD 1.1bnCAD 1.1bnCAD 1.2bnCAD 1.2bn+5.1%
    Less capital expenditureCAD -3.0bnCAD -3.1bnCAD -3.3bnCAD -3.5bnCAD -3.6bn+5.1%
    Less increase in working capitalCAD 180.6mCAD 189.9mCAD 199.6mCAD 209.9mCAD 220.7m-5.1%
    Free cashflow to firmCAD 319.2mCAD 335.6mCAD 352.9mCAD 371.0mCAD 390.0m+5.1%
    Discount factor0.97490.92650.88060.83690.7954-
    Present valueCAD 311.2mCAD 311.0mCAD 310.7mCAD 310.5mCAD 310.2m-0.1%
    Present Value Of The ForecastCAD 1.6bn

    Discount Rate

    Source shown per component. All overridable above.

    Risk-free rate3.30%CAD assumption - no free live source available for this market (assumption)
    Equity risk premium5.50%Market assumption
    Beta0.582Reported 0.376, pulled toward 1.0 (Blume)
    Cost of equity6.50%Risk-free + beta x equity risk premium
    Cost of debt3.65%Interest expense / average total debt
    Market capitalisationCAD 31.1bn61.9% of capital
    Total debtCAD 19.2bn38.1% of capital, book value as a proxy
    Tax rate14.0%Effective, capped at statutory
    WACC5.22%E/V x Re + D/V x Rd x (1 - t)

    Terminal Value

    Perpetuity growth is intrinsic. The exit multiple defaults to the company's current EV/EBITDA, so it answers a different question - what the shares are worth if today's rating holds and EBITDA grows as forecast.

    Perpetuity growth at 2.50%

    Value per shareCAD 52.38

    97% of EV

    Forecast FCFF, final year
    CAD 390.0m
    Capex at depreciation, working capital in reinvestment
    CAD 2.7bn
    Less reinvestment at g/ROIC (39.4% of NOPAT)
    CAD -1.1bn
    Capitalised
    CAD 1.6bn
    ROIC (reported)
    6.4%
    Terminal value, undiscounted
    CAD 61.0bn
    Terminal value, discounted
    CAD 48.5bn
    Enterprise value
    CAD 50.1bn
    Less net debt
    CAD 18.6bn
    Equity value
    CAD 31.5bn

    Exit at 14.9x EBITDA

    Value per shareCAD 54.66

    97% of EV

    Terminal value, undiscounted
    CAD 62.7bn
    Terminal value, discounted
    CAD 49.9bn
    Enterprise value
    CAD 51.4bn
    Less net debt
    CAD 18.6bn
    Equity value
    CAD 32.8bn

    Spread between methods: 4%.

    Sensitivity

    Value per share (CAD) by discount rate and long-run growth.

    Long-run growth
    Discount rate1.50%2.00%2.50%3.00%3.50%
    3.22%145.45192.49304.45924.20—
    4.22%76.8587.83105.02136.07209.84
    5.22%45.2848.3252.3858.1567.11
    6.22%27.1927.6428.1528.7229.42
    7.22%17.1417.3717.5917.8218.04

    Outlined: this model. Green text: above today's price of 51.90. Shading: distance from this model's own value.

    Priced In

    What each input would have to be to justify the current price, one at a time.

    InputModelImpliedGap
    Revenue growth, every year5.1%5.0%-0.1pp
    EBIT margin25.7%25.6%-0.1pp
    Discount rate5.2%5.2%+0.0pp
    Download as Excel

    Live formulas, not pasted numbers - edit a driver and the workbook reprices.

    Yahoo Finance and RBA data. General information, not advice. Methodology.