A Look At The Intrinsic Value Of One Software Technologies Ltd (TLV:ONE)

Key Insights

  • One Software Technologies’ estimated fair value is ₪53.3 based on 2 Stage Free Cash Flow to Equity
  • Current share price of ₪46.6 suggests One Software Technologies is trading close to its fair value
  • One Software Technologies’ peers are currently trading at a premium of 106% on average

How far off is One Software Technologies Ltd (TLV:ONE) from its intrinsic value? Using the most recent financial data, we’ll take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. 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. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

Check out our latest analysis for One Software Technologies

Is One Software Technologies Fairly Valued?

We’re using the 2-stage growth model, which simply means we take into 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. 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 extrapolated 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 need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) forecast

2023 2024 2025 2026 2027 2028 2029 2030 2031 2032
Levered FCF (₪, Millions) ₪276.8m ₪284.5m ₪291.3m ₪297.5m ₪303.3m ₪308.8m ₪314.2m ₪319.4m ₪324.6m ₪329.8m
Growth Rate Estimate Source Is @ 3.31% Is @ 2.77% It is @ 2.40% Is @ 2.13% It is @ 1.95% It is @ 1.82% It is @ 1.73% It is @ 1.67% It is @ 1.62% It is @ 1.59%
Present Value (₪, Millions) Discounted @ 9.0% ₪254 ₪239 ₪225 ₪211 ₪197 ₪184 ₪172 ₪160 ₪150 ₪139

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

The second stage is also known as Terminal Value, this is the business’s cash flow after 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 1.5%. We discount the terminal cash flows to today’s value at a cost of equity of 9.0%.

Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = ₪330m× (1 + 1.5%) ÷ (9.0%– 1.5%) = ₪4.5b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= ₪4.5b÷ (1 + 9.0%)10= ₪1.9b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₪3.8b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of ₪46.6, the company appears about fair value at a 13% discount to where the stock price currently trades. Remember though, that this is just an approximate valuation, and like any complex formula – garbage in, garbage out.

TASE:ONE Discounted Cash Flow January 23rd 2023

Important 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 One Software Technologies 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 9.0%, which is based on a leveraged beta of 1.068. 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 One Software Technologies

strength

  • Earnings growth over the past year exceeded its 5-year average.

  • Debt is not viewed as a risk.

  • Dividends are covered by earnings and cash flows.

weakness

  • Earnings growth over the past year underperformed the IT industry.

  • Dividend is low compared to the top 25% of dividend payers in the IT market.

opportunity

  • Current share price is below our estimate of fair value.

  • Lack of analyst coverage makes it difficult to determine ONE’s earnings prospects.
Threat

  • No apparent threats visible for ONE.

Next Steps:

Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching 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?” For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For One Software Technologies, we’ve put together three relevant aspects you should further examine:

  1. Risks: You should be aware of the 1 warning sign for One Software Technologies we’ve uncovered before considering an investment in the company.
  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. 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 One Software Technologies 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

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.

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