Advertisement
Canada markets open in 4 hours 26 minutes
  • S&P/TSX

    22,107.08
    +194.56 (+0.89%)
     
  • S&P 500

    5,248.49
    +44.91 (+0.86%)
     
  • DOW

    39,760.08
    +477.75 (+1.22%)
     
  • CAD/USD

    0.7351
    -0.0022 (-0.30%)
     
  • CRUDE OIL

    81.81
    +0.46 (+0.57%)
     
  • Bitcoin CAD

    96,120.47
    +1,547.40 (+1.64%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • GOLD FUTURES

    2,216.30
    +3.60 (+0.16%)
     
  • RUSSELL 2000

    2,114.35
    +44.19 (+2.13%)
     
  • 10-Yr Bond

    4.1960
    0.0000 (0.00%)
     
  • NASDAQ futures

    18,490.25
    -13.50 (-0.07%)
     
  • VOLATILITY

    12.95
    +0.17 (+1.33%)
     
  • FTSE

    7,957.73
    +25.75 (+0.32%)
     
  • NIKKEI 225

    40,168.07
    -594.66 (-1.46%)
     
  • CAD/EUR

    0.6812
    +0.0007 (+0.10%)
     

Estimating The Intrinsic Value Of Enghouse Systems Limited (TSE:ENGH)

Does the share price for Enghouse Systems Limited (TSE:ENGH) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value by projecting its future cash flows and then discounting them to today’s value. I will use the discounted cash flows (DCF) model. It may sound complicated, but actually it is quite simple! If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model. If you are reading this and its not June 2018 then I highly recommend you check out the latest calculation for Enghouse Systems by following the link below. Check out our latest analysis for Enghouse Systems

The model

I’m 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 perpetual stable growth rate. In the first stage we need to estimate the cash flows to the business over the next five years. Where possible I use analyst estimates, but when these aren’t available I have extrapolated the previous free cash flow (FCF) from the year before. For this growth rate I used the average annual growth rate over the past five years, but capped at a reasonable level. I then discount the sum of these cash flows to arrive at a present value estimate.

5-year cash flow estimate

2018

2019

2020

2021

2022

Levered FCF (CA$, Millions)

CA$90.31

CA$94.96

CA$108.20

CA$123.30

CA$140.50

Source

Analyst x2

Analyst x3

Extrapolated @ (13.95%)

Extrapolated @ (13.95%)

Extrapolated @ (13.95%)

Present Value Discounted @ 8.47%

CA$83.26

CA$80.71

CA$84.79

CA$89.07

CA$93.58

Present Value of 5-year Cash Flow (PVCF)= CA$431.41m

ADVERTISEMENT

The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of the GDP. In this case I have used the 10-year government bond rate (2.3%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 8.5%.

Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = CA$140.50m × (1 + 2.3%) ÷ (8.5% – 2.3%) = CA$2.35b

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = CA$2.35b ÷ ( 1 + 8.5%)5 = CA$1.56b

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is CA$1.99b. The last step is to then divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) then we use the equivalent number. This results in an intrinsic value of CA$73.62. Relative to the current share price of CA$75.22, the stock is fair value, maybe slightly overvalued at the time of writing.

TSX:ENGH Intrinsic Value June 21st 18
TSX:ENGH Intrinsic Value June 21st 18

Important assumptions

I’d like to 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 my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at Enghouse Systems as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 8.5%, which is based on a levered beta of 0.800. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Next Steps:

Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company.

For ENGH, there are three important factors you should look at:

  1. Financial Health: Does ENGH have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.

  2. Future Earnings: How does ENGH’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.

  3. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of ENGH? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St does a DCF calculation for every CA stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.


To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.