Intrinsic value of Enghouse Systems Limited - ENGH

Previous Close

$52.90

  Intrinsic Value

$55.04

stock screener

  Rating & Target

hold

+4%

  Value-price divergence*

0%

Previous close

$52.90

 
Intrinsic value

$55.04

 
Up/down potential

+4%

 
Rating

hold

 
Value-price divergence*

0%

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of ENGH stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 1.4

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  10.39
  6.80
  6.62
  6.46
  6.31
  6.18
  6.06
  5.96
  5.86
  5.77
  5.70
  5.63
  5.56
  5.51
  5.46
  5.41
  5.37
  5.33
  5.30
  5.27
  5.24
  5.22
  5.20
  5.18
  5.16
  5.14
  5.13
  5.12
  5.10
  5.09
  5.08
Revenue, $m
  308
  329
  351
  373
  397
  421
  447
  474
  501
  530
  561
  592
  625
  660
  696
  733
  773
  814
  857
  902
  949
  999
  1,051
  1,105
  1,162
  1,222
  1,285
  1,350
  1,419
  1,492
  1,567
Variable operating expenses, $m
 
  112
  119
  125
  132
  140
  147
  155
  163
  172
  181
  176
  186
  196
  207
  218
  229
  242
  254
  268
  282
  297
  312
  328
  345
  363
  381
  401
  421
  443
  465
Fixed operating expenses, $m
 
  156
  160
  164
  168
  172
  176
  181
  185
  190
  195
  199
  204
  210
  215
  220
  226
  231
  237
  243
  249
  255
  262
  268
  275
  282
  289
  296
  303
  311
  319
Total operating expenses, $m
  254
  268
  279
  289
  300
  312
  323
  336
  348
  362
  376
  375
  390
  406
  422
  438
  455
  473
  491
  511
  531
  552
  574
  596
  620
  645
  670
  697
  724
  754
  784
Operating income, $m
  54
  61
  72
  84
  97
  110
  124
  138
  153
  169
  185
  217
  235
  254
  274
  295
  318
  341
  365
  391
  418
  447
  477
  509
  542
  577
  614
  653
  694
  738
  783
EBITDA, $m
  85
  88
  100
  113
  127
  141
  155
  171
  187
  204
  221
  240
  259
  280
  301
  324
  347
  372
  399
  426
  455
  486
  518
  552
  587
  625
  664
  706
  749
  795
  844
Interest expense (income), $m
  0
  0
  0
  1
  1
  2
  2
  3
  3
  3
  4
  4
  5
  6
  6
  7
  7
  8
  9
  9
  10
  11
  12
  13
  14
  15
  16
  17
  18
  19
  20
Earnings before tax, $m
  54
  61
  72
  83
  96
  108
  121
  135
  150
  165
  181
  212
  230
  249
  268
  289
  310
  333
  357
  382
  408
  436
  465
  496
  528
  563
  599
  637
  677
  719
  763
Tax expense, $m
  7
  16
  19
  23
  26
  29
  33
  37
  40
  45
  49
  57
  62
  67
  72
  78
  84
  90
  96
  103
  110
  118
  126
  134
  143
  152
  162
  172
  183
  194
  206
Net income, $m
  47
  44
  52
  61
  70
  79
  89
  99
  109
  121
  132
  155
  168
  181
  196
  211
  226
  243
  260
  279
  298
  318
  340
  362
  386
  411
  437
  465
  494
  525
  557

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  86
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  419
  356
  379
  404
  429
  456
  483
  512
  542
  573
  606
  640
  676
  713
  752
  793
  835
  880
  926
  975
  1,026
  1,080
  1,136
  1,195
  1,256
  1,321
  1,389
  1,460
  1,534
  1,613
  1,695
Adjusted assets (=assets-cash), $m
  333
  356
  379
  404
  429
  456
  483
  512
  542
  573
  606
  640
  676
  713
  752
  793
  835
  880
  926
  975
  1,026
  1,080
  1,136
  1,195
  1,256
  1,321
  1,389
  1,460
  1,534
  1,613
  1,695
Revenue / Adjusted assets
  0.925
  0.924
  0.926
  0.923
  0.925
  0.923
  0.925
  0.926
  0.924
  0.925
  0.926
  0.925
  0.925
  0.926
  0.926
  0.924
  0.926
  0.925
  0.925
  0.925
  0.925
  0.925
  0.925
  0.925
  0.925
  0.925
  0.925
  0.925
  0.925
  0.925
  0.924
Average production assets, $m
  84
  89
  95
  101
  108
  114
  121
  128
  136
  144
  152
  160
  169
  179
  188
  199
  209
  221
  232
  244
  257
  271
  285
  299
  315
  331
  348
  366
  385
  404
  425
Working capital, $m
  48
  -40
  -43
  -46
  -49
  -52
  -55
  -58
  -62
  -65
  -69
  -73
  -77
  -81
  -86
  -90
  -95
  -100
  -105
  -111
  -117
  -123
  -129
  -136
  -143
  -150
  -158
  -166
  -175
  -183
  -193
Total debt, $m
  4
  14
  25
  36
  47
  59
  71
  84
  98
  112
  127
  142
  158
  175
  192
  211
  230
  250
  271
  293
  316
  340
  365
  392
  419
  448
  479
  511
  544
  580
  617
Total liabilities, $m
  151
  160
  171
  182
  193
  205
  217
  230
  244
  258
  273
  288
  304
  321
  338
  357
  376
  396
  417
  439
  462
  486
  511
  538
  565
  594
  625
  657
  690
  726
  763
Total equity, $m
  269
  196
  209
  222
  236
  251
  266
  282
  298
  315
  333
  352
  372
  392
  414
  436
  459
  484
  509
  536
  564
  594
  625
  657
  691
  727
  764
  803
  844
  887
  932
Total liabilities and equity, $m
  420
  356
  380
  404
  429
  456
  483
  512
  542
  573
  606
  640
  676
  713
  752
  793
  835
  880
  926
  975
  1,026
  1,080
  1,136
  1,195
  1,256
  1,321
  1,389
  1,460
  1,534
  1,613
  1,695
Debt-to-equity ratio
  0.015
  0.070
  0.120
  0.160
  0.200
  0.240
  0.270
  0.300
  0.330
  0.360
  0.380
  0.400
  0.430
  0.450
  0.470
  0.480
  0.500
  0.520
  0.530
  0.550
  0.560
  0.570
  0.580
  0.600
  0.610
  0.620
  0.630
  0.640
  0.650
  0.650
  0.660
Adjusted equity ratio
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  47
  44
  52
  61
  70
  79
  89
  99
  109
  121
  132
  155
  168
  181
  196
  211
  226
  243
  260
  279
  298
  318
  340
  362
  386
  411
  437
  465
  494
  525
  557
Depreciation, amort., depletion, $m
  31
  27
  28
  29
  30
  31
  32
  33
  34
  35
  36
  23
  24
  26
  27
  28
  30
  32
  33
  35
  37
  39
  41
  43
  45
  47
  50
  52
  55
  58
  61
Funds from operations, $m
  33
  72
  81
  90
  100
  110
  120
  132
  143
  156
  168
  178
  192
  207
  223
  239
  256
  274
  294
  314
  335
  357
  380
  405
  431
  458
  487
  517
  549
  582
  618
Change in working capital, $m
  -27
  -3
  -3
  -3
  -3
  -3
  -3
  -3
  -3
  -4
  -4
  -4
  -4
  -4
  -4
  -5
  -5
  -5
  -5
  -6
  -6
  -6
  -6
  -7
  -7
  -7
  -8
  -8
  -8
  -9
  -9
Cash from operations, $m
  60
  74
  83
  93
  103
  113
  124
  135
  147
  159
  172
  182
  196
  211
  227
  244
  261
  280
  299
  319
  340
  363
  387
  412
  438
  465
  494
  525
  557
  591
  627
Maintenance CAPEX, $m
  0
  -12
  -13
  -14
  -14
  -15
  -16
  -17
  -18
  -19
  -21
  -22
  -23
  -24
  -26
  -27
  -28
  -30
  -32
  -33
  -35
  -37
  -39
  -41
  -43
  -45
  -47
  -50
  -52
  -55
  -58
New CAPEX, $m
  -5
  -6
  -6
  -6
  -6
  -7
  -7
  -7
  -8
  -8
  -8
  -9
  -9
  -9
  -10
  -10
  -11
  -11
  -12
  -12
  -13
  -13
  -14
  -15
  -15
  -16
  -17
  -18
  -19
  -20
  -21
Cash from investing activities, $m
  -64
  -18
  -19
  -20
  -20
  -22
  -23
  -24
  -26
  -27
  -29
  -31
  -32
  -33
  -36
  -37
  -39
  -41
  -44
  -45
  -48
  -50
  -53
  -56
  -58
  -61
  -64
  -68
  -71
  -75
  -79
Free cash flow, $m
  -4
  57
  65
  73
  82
  91
  100
  110
  121
  132
  143
  152
  164
  178
  192
  207
  222
  238
  256
  274
  293
  313
  334
  356
  380
  404
  430
  458
  486
  517
  549
Issuance/(repayment) of debt, $m
  0
  10
  11
  11
  11
  12
  12
  13
  14
  14
  15
  15
  16
  17
  18
  18
  19
  20
  21
  22
  23
  24
  25
  26
  28
  29
  30
  32
  34
  35
  37
Issuance/(repurchase) of shares, $m
  4
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  4
  10
  11
  11
  11
  12
  12
  13
  14
  14
  15
  15
  16
  17
  18
  18
  19
  20
  21
  22
  23
  24
  25
  26
  28
  29
  30
  32
  34
  35
  37
Total cash flow (excl. dividends), $m
  -2
  67
  75
  84
  93
  103
  113
  123
  134
  146
  158
  167
  180
  194
  209
  225
  241
  258
  277
  296
  316
  337
  359
  383
  407
  433
  461
  489
  520
  552
  586
Retained Cash Flow (-), $m
  -26
  -13
  -13
  -13
  -14
  -15
  -15
  -16
  -17
  -17
  -18
  -19
  -20
  -20
  -21
  -22
  -23
  -24
  -26
  -27
  -28
  -29
  -31
  -32
  -34
  -36
  -37
  -39
  -41
  -43
  -45
Prev. year cash balance distribution, $m
 
  86
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  140
  62
  71
  79
  88
  98
  108
  118
  129
  140
  148
  161
  174
  188
  202
  218
  234
  251
  269
  288
  307
  328
  350
  373
  398
  423
  450
  479
  509
  540
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  134
  57
  61
  65
  68
  71
  73
  74
  74
  73
  70
  69
  66
  63
  59
  55
  51
  46
  41
  37
  32
  27
  23
  19
  15
  12
  10
  7
  6
  4
Current shareholders' claim on cash, %
  100
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  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
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  100.0
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  100.0

Enghouse Systems Limited develops and sells enterprise oriented applications software solutions worldwide. It operates two segments, Interactive Management Group and Asset Management Group. The company offers communications software and services, including contact center, self-service, reception and call handling, quality and control, and integration services, as well as attendant console, interactive voice response, dialers, and agent performance optimization and analytics solutions. It also provides business support systems, such as wholesale revenue management, MVNO revenue management, intelligent routing, order management, billing SaaS, customer experience management, and electronic invoice management software applications; operation support systems comprising service assurance, network resource management, and geographic information system solutions; and network and value added services that include mobile value added services, routing and control, security, and call recording solutions. In addition, the company develops and delivers solutions for public and private transportation industries through computerized applications and consulting support, which comprise fixed route scheduling; integrated driver timekeeping and dispatching; real time demand response scheduling and dispatching; traveler information; and integration with CAD/AVL systems, HR/payroll systems, data warehouse applications, and others. Further, it provides and delivers end to end emergency and non-emergency public safety control center and dispatch systems. The company serves government, utilities, high technology, health care, and hospitality organizations; and telecommunications service providers, rural cooperatives, mobile network operators, competitive service and satellite communications providers, inflight broadband providers, cities, municipalities, and public-private partnerships. The company was founded in 1984 and is headquartered in Markham, Canada.

FINANCIAL RATIOS  of  Enghouse Systems Limited (ENGH)

Valuation Ratios
P/E Ratio 30.3
Price to Sales 4.6
Price to Book 5.3
Price to Tangible Book
Price to Cash Flow 23.7
Price to Free Cash Flow 25.9
Growth Rates
Sales Growth Rate 10.4%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 66.7%
Cap. Spend. - 3 Yr. Gr. Rate 38%
Financial Strength
Quick Ratio NaN
Current Ratio 0
LT Debt to Equity 1.5%
Total Debt to Equity 1.5%
Interest Coverage 0
Management Effectiveness
Return On Assets 11.8%
Ret/ On Assets - 3 Yr. Avg. 10.2%
Return On Total Capital 18.2%
Ret/ On T. Cap. - 3 Yr. Avg. 15.8%
Return On Equity 18.4%
Return On Equity - 3 Yr. Avg. 15.8%
Asset Turnover 0.8
Profitability Ratios
Gross Margin 68.5%
Gross Margin - 3 Yr. Avg. 69.1%
EBITDA Margin 27.6%
EBITDA Margin - 3 Yr. Avg. 24.9%
Operating Margin 17.5%
Oper. Margin - 3 Yr. Avg. 15.2%
Pre-Tax Margin 17.5%
Pre-Tax Margin - 3 Yr. Avg. 15.4%
Net Profit Margin 15.3%
Net Profit Margin - 3 Yr. Avg. 13.3%
Effective Tax Rate 13%
Eff/ Tax Rate - 3 Yr. Avg. 13.7%
Payout Ratio 29.8%

ENGH stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the ENGH stock intrinsic value calculation we used $308 million for the last fiscal year's total revenue generated by Enghouse Systems Limited. The default revenue input number comes from 2016 income statement of Enghouse Systems Limited. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our ENGH stock valuation model: a) initial revenue growth rate of 6.8% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for ENGH is calculated based on our internal credit rating of Enghouse Systems Limited, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Enghouse Systems Limited.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of ENGH stock the variable cost ratio is equal to 34.4%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $152 million in the base year in the intrinsic value calculation for ENGH stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for Enghouse Systems Limited.

Corporate tax rate of 27% is the nominal tax rate for Enghouse Systems Limited. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the ENGH stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for ENGH are equal to 27.1%.

Life of production assets of 7 years is the average useful life of capital assets used in Enghouse Systems Limited operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for ENGH is equal to -12.3%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $269 million for Enghouse Systems Limited - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 26.763 million for Enghouse Systems Limited is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Enghouse Systems Limited at the current share price and the inputted number of shares is $1.4 billion.

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Stock chart of ENGH Financial statements of ENGH
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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