Estimating The Intrinsic Value Of Top Ramdor Systems & Computers Co. (1990) Ltd (TLV:TOPS)

Key Insights

• The projected fair value for Top Ramdor Systems & Computers (1990) is ₪8.25 based on 2 Stage Free Cash Flow to Equity
• Current share price of ₪9.81 suggests Top Ramdor Systems & Computers (1990) is potentially trading close to its fair value
• Industry average of 14% suggests Top Ramdor Systems & Computers (1990)'s peers are currently trading at a lower premium to fair value

Today we will run through one way of estimating the intrinsic value of Top Ramdor Systems & Computers Co. (1990) Ltd (TLV:TOPS) by estimating the company's future cash flows and discounting them to their present value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Believe it or not, it's not too difficult to follow, as you'll see from our example!

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

Check out our latest analysis for Top Ramdor Systems & Computers (1990)

The Model

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. 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 need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (₪, Millions)	₪15.7m	₪15.9m	₪16.0m	₪16.2m	₪16.5m	₪16.7m	₪17.0m	₪17.2m	₪17.5m	₪17.8m
Growth Rate Estimate Source	Est @ 0.46%	Est @ 0.84%	Est @ 1.10%	Est @ 1.28%	Est @ 1.41%	Est @ 1.50%	Est @ 1.56%	Est @ 1.61%	Est @ 1.64%	Est @ 1.66%
Present Value (₪, Millions) Discounted @ 11%	₪14.2	₪13.0	₪11.9	₪10.9	₪10.0	₪9.2	₪8.4	₪7.8	₪7.1	₪6.6

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₪99m

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. 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 (1.7%) 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 11%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = ₪18m× (1 + 1.7%) ÷ (11%– 1.7%) = ₪206m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ₪206m÷ ( 1 + 11%)¹⁰= ₪76m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₪175m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of ₪9.8, the company appears around fair value at the time of writing. 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. 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 Top Ramdor Systems & Computers (1990) 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 11%, which is based on a levered beta of 1.229. 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:

Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize 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 Top Ramdor Systems & Computers (1990), we've put together three relevant items you should further examine:

1. Risks: You should be aware of the 2 warning signs for Top Ramdor Systems & Computers (1990) we've uncovered before considering an investment in the company.
2. 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!
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.