A Look At The Fair Value Of Lapidoth-Heletz Limited Partnership (TLV:LPHL)

Key Insights

• Lapidoth-Heletz Limited Partnership's estimated fair value is ₪1.27 based on 2 Stage Free Cash Flow to Equity
• With ₪1.16 share price, Lapidoth-Heletz Limited Partnership appears to be trading close to its estimated fair value
• Industry average discount to fair value of 35% suggests Lapidoth-Heletz Limited Partnership's peers are currently trading at a higher discount

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Lapidoth-Heletz Limited Partnership (TLV:LPHL) as an investment opportunity by taking the expected future cash flows and discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

See our latest analysis for Lapidoth-Heletz Limited Partnership

Is Lapidoth-Heletz Limited Partnership Fairly Valued?

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To begin with, we have to get estimates of 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.

Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (₪, Millions)	₪1.29m	₪2.18m	₪3.23m	₪4.34m	₪5.41m	₪6.37m	₪7.20m	₪7.90m	₪8.48m	₪8.97m
Growth Rate Estimate Source	Est @ 96.65%	Est @ 68.22%	Est @ 48.32%	Est @ 34.39%	Est @ 24.64%	Est @ 17.82%	Est @ 13.04%	Est @ 9.69%	Est @ 7.35%	Est @ 5.71%
Present Value (₪, Millions) Discounted @ 8.8%	₪1.2	₪1.8	₪2.5	₪3.1	₪3.6	₪3.8	₪4.0	₪4.0	₪4.0	₪3.9

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₪32m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 1.9%. We discount the terminal cash flows to today's value at a cost of equity of 8.8%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = ₪9.0m× (1 + 1.9%) ÷ (8.8%– 1.9%) = ₪133m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ₪133m÷ ( 1 + 8.8%)¹⁰= ₪57m

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 ₪89m. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of ₪1.2, the company appears about fair value at a 9.0% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

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 Lapidoth-Heletz Limited Partnership 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 8.8%, which is based on a levered beta of 1.132. 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.

SWOT Analysis for Lapidoth-Heletz Limited Partnership

Moving On:

Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for a company. It's not possible to obtain a foolproof valuation with a DCF model. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or 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 Lapidoth-Heletz Limited Partnership, we've compiled three essential factors you should further examine:

1. Risks: Every company has them, and we've spotted 5 warning signs for Lapidoth-Heletz Limited Partnership (of which 3 are concerning!) you should know about.
2. Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
3. Other Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!

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.

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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.