How to value ReFi
Written by our lead farmer, Ξ huf
Investors often ask us how to value ReFi. Here are our thoughts.
In traditional finance, a company will pay dividends based on operating business performance. ReFi is similar in that it will pay out ETH distributions based on how well it's farming as a service portfolio performs. There are two main traditional ways to value such growth, and thus the equity stock of the company.
- Discounted Cash Flow (DCF) Model
The first way is a DCF model.
These are our (very conservative) assumptions:
Trading Volume: For those who aren’t aware, 12% of every transaction is taxed and sent to the treasury. We will assume an average starting daily trading volume of $50,000. This volume will increase by 20% each quarter.
Farming Yield: Over the last 100 days, our farmers have returned 46.4% of net profit on capital deployed. We will assume this growth in the future, which equates to about 43% every quarter (~91 days). It’s important to note that these yields were achieved in bearish and choppy markets and again highlights the ultra-conservative model.
Expenses: Every week, ReFi has about $30,000 in expenses, whether that be paying salaries and vendors, marketing the project, or collaborating with other teams. We expect this to increase 30% each quarter, although in reality it will likely be less than this since digital asset firms like ReFi don’t have real estate and other large operating costs.
Biweekly Dividend: Every two weeks, ReFi pays out a dividend. This is equal to 22% of the farmed yields over that period of time. This model is also relevant if the 12% Treasury Tax is split between reflections and biweekly distributions.
Opportunity Cost of Capital: This percentage indicates the opportunity cost of investing your money with ReFi. In a DCF, this is the percentage by which the Cash Flows are discounted back to the present value. This is a bit tricky to estimate. In traditional finance, this is usually around 10%, In this case, we assumed 20%, which is a baseline opportunity cost if you were to put your money into Anchor or other “safe plays” per se.
Looking at our actual model, we start off with $2,850,000 in our treasury. Each quarter, the two inflows into the project are the 12% treasury tax, and the farming yield that is generated. Using our assumptions, we will have $4,550,000 of volume during the quarter which will equate to $546,000 of inflow due to transfer taxes. Another additional $1,227,244 is from accrued farming yields. During this quarter, we expect to pay $390,000 in expenses and airdrop out $269,994 of dividends.
This results in net earnings of $1,113,250 for the quarter, and the ending balance of the treasury is now $3,963.250. Continuing our calculations for 5 years gives us the model shown below.
You’ll notice a new row called “PV of Dividends.” This is the value of the dividends discounted back to present using the opportunity cost of capital listed prior (20%). Using these PVs, we can find a hypothetical MC for an “x” year duration investment period.
For example, a 3 year DCF would result in $16.73m of dividends, and a $51.02m present value treasury, resulting in a hypothetical $67.75m market cap. This number greatly increases when looking at a longer time span due to the effects of exponential growth. It’s important to note that most traditional DCFs are looking at a 10-year investment window, in which case ReFi is a $1bn+ company.
2. Price/Earnings (P/E) Multiple and comparables.
The second most common way companies are valued is with a comparable analysis model.
Essentially, take companies similar in the space and see how they are trading/valued to come to a logical valuation for your company. This is somewhat tricky as there are no traditional companies out there in the FaaS space. This is why we decided to look at companies in the Investment/Asset Wealth Management and Private Equity industries. Our reasoning behind using these industries as comparables is because the underlying business of managing a certain treasury of money by diversifying investments is similar to ReFi.
It’s also important to consider what ratios to look at when doing a comps analysis. When digging through the financial statements and quarterly updates of large names such as Blackrock, KKR and Vanguard, many different financial metrics came up: working capital ratio, debt to equity ratio, quick ratio, etc. Most of these ratios just simply aren’t applicable to ReFi. Our structure is relatively simple; we have no debts, and our inflows and outflows are confined to four main tranches. This is why we decided that when comparing to these industries, the P/E ratio would be our biggest emphasis.
Top Investment Management and Private Equity companies have a P/E ratio around 10.75 and 11.10 respectively.
Applying this to ReFi, using past earnings growth (~33%/quarter), we expect 2022 earnings to be around $5.38m (see model above for specific quarterly earnings). Based on these comparable 10.75 and 11.10 P/E ratios, hypothetical MCs range from $57.90m and $59.76m.
The table below summarizes the different hypothetical MC’s for the ReFi project. You can see a range of estimated prices for the ReFi token we believe is a fair value.
The current price of ReFi is $0.0243, so using our very conservative figures ReFi is undervalued by an order of magnitude of at least 10x from here.
This modelling also does not take into account any future product developments or partnerships by the team that could lead to rapid acceleration of the Treasury balance. Indeed, our goal here was to show that even in the most conservative financial modelling ReFi is “cheap”.
The team at ReFi has been consistently growing these past few months and rest assured, you are in good hands. We have a variety of exciting updates and news in store for you all and are all very excited for the future of this project.
As always, we appreciate your time and thank you for reading.