What is OFS's Intrinsic value?

OFS Capital Corp (OFS) Intrinsic Value Analysis

Executive Summary

As of June 13, 2025, OFS Capital Corp's estimated intrinsic value ranges from $0.78 to $61.30 per share, depending on the valuation methodology applied.

Valuation Method Fair Value (USD) Implied Upside/Downside
Discounted Cash Flow (10Y) $1.66 -81.4%
Discounted Cash Flow (5Y) $0.78 -91.3%
Dividend Discount Model (Multi-Stage) $31.30 +250.5%
Dividend Discount Model (Stable) $61.30 +586.4%

Is OFS Capital Corp (OFS) undervalued or overvalued?

With the current market price at $8.93, the stock appears to be significantly undervalued.

Understanding Intrinsic Value

Intrinsic value represents the "true" worth of a company based on its fundamentals rather than market sentiment. We've employed multiple methodologies to triangulate OFS Capital Corp's intrinsic value, including:

  1. Discounted Cash Flow (DCF): Values the company based on projected future cash flows
  2. Dividend Discount Model (DDM): Values the company based on expected future dividend payments

Weighted Average Cost of Capital (WACC)

The cost of capital is a critical factor in valuation models, representing the required return for investors.

WACC Component Low High
Long-term bond rate 3.9% 4.4%
Equity market risk premium 4.6% 5.6%
Adjusted beta 0.56 0.67
Cost of equity 6.5% 8.6%
Cost of debt 5.0% 15.6%
Tax rate 26.2% 27.0%
Debt/Equity ratio 2.18 2.18
After-tax WACC 4.6% 10.5%

Valuation Methods

1. Discounted Cash Flow (DCF) Valuation

Our DCF model projects cash flows over 5-year and 10-year horizons, with the following key assumptions:

  • Forecast Period: 5-year DCF and 10-year DCF
  • Terminal Growth Rate: 0.0% (range: 3.0% - 5.0%)
  • Discount Rate: 7.5% (range: 0.0% - 9.3%)

Key Projections:

  • Revenue growth from $48 (FY12-2024) to $48 (FY12-2034)
  • Net profit margin expansion from 59% to 54%
  • Capital expenditures maintained at approximately 0% of revenue
DCF Model Fair Value Enterprise Value % from Terminal Value
5-Year Growth $1 $253M 82.2%
10-Year Growth $2 $265M 68.1%
5-Year EBITDA $(1,234) $153M 70.5%
10-Year EBITDA $(1,234) $175M 51.6%

2. Dividend Discount Model (DDM)

The DDM values a company based on its expected future dividend payments. We used two approaches:

Multi-Stage DDM:

  • Current payout ratio: 60.3%
  • Stable payout ratio: 90.0%
  • Growth transition: 5 years
  • Cost of equity: 7.5%
  • Long-term growth rate: 3.7%
  • Fair value: $31.30 (250.5% from current price)

Stable DDM:

  • Stable payout ratio: 70% (Low) to 90% (High)
  • Cost of equity: 8.6% (Low) to 6.5% (High)
  • Long-term growth rate: 3.0% (Low) to 4.3% (High)
  • Fair value range: $28 to $94
  • Selected fair value: $61.30 (586.4% from current price)

Key Financial Metrics

Metric Value
Market Capitalization $120M
Enterprise Value $362M
Trailing P/E 3.96
Forward P/E 6.33
Trailing EV/EBITDA 7.85
Current Dividend Yield 1609.20%
Dividend Growth Rate (5Y) 12.51%
Debt-to-Equity Ratio 2.18

Investment Decision Framework

To determine the most reliable intrinsic value estimate, we weigh each valuation method based on:

  1. Forecast Certainty: DCF methods rely on long-term projections, while earnings power value focuses on current normalized earnings
  2. Business Model Alignment: Dividend models are more appropriate for mature companies with established dividend policies
  3. Historical Accuracy: How well each method has predicted fair value historically

Valuation Weight Matrix

Valuation Method Weight Weighted Value
Discounted Cash Flow (10Y) 33% $0.50
Discounted Cash Flow (5Y) 28% $0.19
Dividend Discount Model (Multi-Stage) 22% $6.26
Dividend Discount Model (Stable) 17% $9.19
Weighted Average 100% $17.94

Investment Conclusion

Based on our comprehensive valuation analysis, OFS Capital Corp's weighted average intrinsic value is $17.94, which is approximately 100.9% above the current market price of $8.93.

Key investment considerations:

  • Strong projected earnings growth (59% to 54% margin)
  • Consistent cash flow generation
  • Historical dividend growth of 12.51%

Given these factors, we believe OFS Capital Corp is currently significantly undervalued with the potential for long-term appreciation based on the company's growth trajectory and financial strength.