- Real Estate
Estimating The Intrinsic Value Of BIG Shopping Centers Ltd (TLV:BIG)
In this article we are going to estimate the intrinsic value of BIG Shopping Centers Ltd (TLV:BIG) by taking the expected future cash flows and discounting them to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. 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 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.
Check out our latest analysis for BIG Shopping Centers
Is BIG Shopping Centers 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 discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) estimate
|Levered FCF (₪, Millions)||₪747.5m||₪850.1m||₪935.9m||₪1.01b||₪1.06b||₪1.11b||₪1.15b||₪1.19b||₪1.22b||₪1.25b|
|Growth Rate Estimate Source||Est @ 18.91%||Est @ 13.72%||Est @ 10.10%||Est @ 7.56%||Est @ 5.78%||Est @ 4.53%||Est @ 3.66%||Est @ 3.05%||Est @ 2.63%||Est @ 2.33%|
|Present Value (₪, Millions) Discounted @ 16%||₪645||₪632||₪600||₪557||₪508||₪458||₪409||₪364||₪322||₪284|
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₪4.8b
We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (1.6%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 16%.
Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = ₪1.2b× (1 + 1.6%) ÷ (16%– 1.6%) = ₪8.9b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= ₪8.9b÷ ( 1 + 16%)10= ₪2.0b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₪6.8b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of ₪350, the company appears around fair value at the time of writing. 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.
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 BIG Shopping Centers 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 16%, which is based on a levered beta of 2.000. 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 BIG Shopping Centers
- Earnings growth over the past year exceeded the industry.
- Dividends are covered by earnings and cash flows.
- Interest payments on debt are not well covered.
- Dividend is low compared to the top 25% of dividend payers in the Real Estate market.
- Current share price is above our estimate of fair value.
- BIG's financial characteristics indicate limited near-term opportunities for shareholders.
- Lack of analyst coverage makes it difficult to determine BIG's earnings prospects.
- Debt is not well covered by operating cash flow.
Although the valuation of a company is important, it 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. 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 instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For BIG Shopping Centers, we've compiled three essential elements you should assess:
- Risks: Case in point, we've spotted 3 warning signs for BIG Shopping Centers you should be aware of, and 1 of them makes us a bit uncomfortable.
- 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!
- 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.
Valuation is complex, but we're helping make it simple.
Find out whether BIG Shopping Centers is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
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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.
BIG Shopping Centers
BIG Shopping Centers Ltd invests in, develops, operates, and manages shopping centers and lifestyles primarily in Israel, the United States, and Serbia.
Average dividend payer with questionable track record.