Calculating The Fair Value Of Speedvalue Ltd (TLV:SPDV)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Speedvalue fair value estimate is ₪5.63
• With ₪5.35 share price, Speedvalue appears to be trading close to its estimated fair value
• Peers of Speedvalue are currently trading on average at a 109% premium

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Speedvalue Ltd (TLV:SPDV) as an investment opportunity by taking the expected future cash flows and discounting them to today's value. One way to achieve this is by employing 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. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

View our latest analysis for Speedvalue

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, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) forecast

	2023	2024	2025	2026	2027	2028	2029	2030	2031	2032
Levered FCF (₪, Millions)	₪8.14m	₪7.78m	₪7.58m	₪7.48m	₪7.45m	₪7.46m	₪7.51m	₪7.58m	₪7.66m	₪7.76m
Growth Rate Estimate Source	Est @ -6.99%	Est @ -4.40%	Est @ -2.59%	Est @ -1.33%	Est @ -0.44%	Est @ 0.18%	Est @ 0.62%	Est @ 0.92%	Est @ 1.13%	Est @ 1.28%
Present Value (₪, Millions) Discounted @ 9.7%	₪7.4	₪6.5	₪5.7	₪5.2	₪4.7	₪4.3	₪3.9	₪3.6	₪3.3	₪3.1

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₪48m

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 1.6%. We discount the terminal cash flows to today's value at a cost of equity of 9.7%.

Terminal Value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = ₪7.8m× (1 + 1.6%) ÷ (9.7%– 1.6%) = ₪98m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ₪98m÷ ( 1 + 9.7%)¹⁰= ₪39m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₪86m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of ₪5.4, the company appears about fair value at a 5.0% 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.

Important Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Speedvalue 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 9.7%, which is based on a levered beta of 1.129. 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:

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. 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 Speedvalue, there are three pertinent items you should further research:

1. Risks: For instance, we've identified 1 warning sign for Speedvalue that you should be aware of.
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 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.