Estimating The Fair Value Of Averbuch Formica Center Ltd. (TLV:AVER)

Key Insights

• Averbuch Formica Center's estimated fair value is ₪9.75 based on 2 Stage Free Cash Flow to Equity
• Averbuch Formica Center's ₪9.17 share price indicates it is trading at similar levels as its fair value estimate
• The average premium for Averbuch Formica Center's competitorsis currently 44,653%

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Averbuch Formica Center Ltd. (TLV:AVER) as an investment opportunity by projecting its future cash flows and then discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

See our latest analysis for Averbuch Formica Center

Is Averbuch Formica Center Fairly Valued?

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. In the first stage we need to estimate the cash flows to the business over the next ten years. 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.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) forecast

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (₪, Millions)	₪6.96m	₪5.73m	₪5.06m	₪4.68m	₪4.47m	₪4.35m	₪4.31m	₪4.30m	₪4.33m	₪4.38m
Growth Rate Estimate Source	Est @ -26.22%	Est @ -17.67%	Est @ -11.69%	Est @ -7.50%	Est @ -4.57%	Est @ -2.52%	Est @ -1.08%	Est @ -0.08%	Est @ 0.63%	Est @ 1.12%
Present Value (₪, Millions) Discounted @ 8.1%	₪6.4	₪4.9	₪4.0	₪3.4	₪3.0	₪2.7	₪2.5	₪2.3	₪2.1	₪2.0

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₪33m

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.3%. We discount the terminal cash flows to today's value at a cost of equity of 8.1%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = ₪4.4m× (1 + 2.3%) ÷ (8.1%– 2.3%) = ₪76m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ₪76m÷ ( 1 + 8.1%)¹⁰= ₪35m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₪68m. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of ₪9.2, the company appears about fair value at a 6.0% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

The Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own assumptions. 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 Averbuch Formica Center 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 8.1%, which is based on a levered beta of 1.137. 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 is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For Averbuch Formica Center, we've compiled three pertinent items you should explore:

1. Risks: We feel that you should assess the 3 warning signs for Averbuch Formica Center (1 can't be ignored!) we've flagged before making an investment in the company.
2. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
3. Other Top Analyst Picks: Interested to see what the analysts are thinking? Take a look at our interactive list of analysts' top stock picks to find out what they feel might have an attractive future outlook!

PS. Simply Wall St updates its DCF calculation for every Israeli stock every day, so if you want to find the intrinsic value of any other stock just search here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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 long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.