A Look At The Intrinsic Value Of Mega Or Holdings Ltd (TLV:MGOR)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Mega Or Holdings fair value estimate is ₪94.76
• Current share price of ₪92.45 suggests Mega Or Holdings is potentially trading close to its fair value
• Mega Or Holdings' peers are currently trading at a premium of 168% on average

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Mega Or Holdings Ltd (TLV:MGOR) as an investment opportunity by estimating the company's future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Don't get put off by the jargon, the math behind it is actually quite straightforward.

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. 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 Mega Or Holdings

What's The Estimated Valuation?

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 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.

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) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (₪, Millions)	₪217.4m	₪266.7m	₪310.8m	₪348.8m	₪380.8m	₪407.6m	₪430.4m	₪449.9m	₪467.0m	₪482.4m
Growth Rate Estimate Source	Est @ 31.54%	Est @ 22.71%	Est @ 16.53%	Est @ 12.21%	Est @ 9.18%	Est @ 7.06%	Est @ 5.57%	Est @ 4.53%	Est @ 3.81%	Est @ 3.30%
Present Value (₪, Millions) Discounted @ 12%	₪194	₪212	₪220	₪219	₪213	₪203	₪191	₪178	₪165	₪152

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₪1.9b

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 2.1%. We discount the terminal cash flows to today's value at a cost of equity of 12%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = ₪482m× (1 + 2.1%) ÷ (12%– 2.1%) = ₪4.8b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ₪4.8b÷ ( 1 + 12%)¹⁰= ₪1.5b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₪3.5b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of ₪92.5, the company appears about fair value at a 2.4% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

Important Assumptions

We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the 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 Mega Or Holdings 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 12%, which is based on a levered beta of 1.806. 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 Mega Or Holdings

Looking Ahead:

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. The DCF model is not a perfect stock valuation tool. 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. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Mega Or Holdings, we've put together three fundamental aspects you should further examine:

1. Risks: Be aware that Mega Or Holdings is showing 3 warning signs in our investment analysis , and 2 of those are significant...
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.