- Israel
- /
- Consumer Durables
- /
- TASE:TMIS
Estimating The Intrinsic Value Of B. Yair Building Corporation 1988 Ltd (TLV:BYAR)
In this article we are going to estimate the intrinsic value of B. Yair Building Corporation 1988 Ltd (TLV:BYAR) by taking the forecast future cash flows of the company and discounting them back to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.
Check out our latest analysis for B. Yair Building Corporation 1988
Crunching the numbers
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. To start off with, we need to estimate the next ten years of cash flows. 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.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) forecast
2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | |
Levered FCF (₪, Millions) | ₪6.46m | ₪6.50m | ₪6.56m | ₪6.64m | ₪6.72m | ₪6.81m | ₪6.90m | ₪7.00m | ₪7.11m | ₪7.22m |
Growth Rate Estimate Source | Est @ 0.27% | Est @ 0.66% | Est @ 0.93% | Est @ 1.12% | Est @ 1.25% | Est @ 1.34% | Est @ 1.41% | Est @ 1.45% | Est @ 1.49% | Est @ 1.51% |
Present Value (₪, Millions) Discounted @ 7.2% | ₪6.0 | ₪5.7 | ₪5.3 | ₪5.0 | ₪4.7 | ₪4.5 | ₪4.2 | ₪4.0 | ₪3.8 | ₪3.6 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₪46m
The second stage is also known as Terminal Value, this is the business's cash flow after 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 1.6%. We discount the terminal cash flows to today's value at a cost of equity of 7.2%.
Terminal Value (TV)= FCF2031 × (1 + g) ÷ (r – g) = ₪7.2m× (1 + 1.6%) ÷ (7.2%– 1.6%) = ₪129m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= ₪129m÷ ( 1 + 7.2%)10= ₪64m
The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is ₪110m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of ₪20.7, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.
Important assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 B. Yair Building Corporation 1988 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 7.2%, which is based on a levered beta of 1.144. 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.
Looking Ahead:
Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For B. Yair Building Corporation 1988, we've compiled three additional factors you should assess:
- Risks: You should be aware of the 5 warning signs for B. Yair Building Corporation 1988 (2 shouldn't be ignored!) we've uncovered before considering an investment in the company.
- 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!
- 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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the TASE every day. If you want to find the calculation for other stocks just search here.
Valuation is complex, but we're here to simplify it.
Discover if Themis G.R.E.N might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
Access Free AnalysisHave feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
About TASE:TMIS
Themis G.R.E.N
A construction company, plans, develops, builds, and markets real estate projects in Israel and internationally.
Flawless balance sheet, good value and pays a dividend.