Intrinsic value of Enghouse Systems Limited - ENGH

Previous Close

$52.30

  Intrinsic Value

$31.34

stock screener

  Rating & Target

sell

-40%

  Value-price divergence*

0%

Previous close

$52.30

 
Intrinsic value

$31.34

 
Up/down potential

-40%

 
Rating

sell

 
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
  2.00
  2.30
  2.57
  2.81
  3.03
  3.23
  3.41
  3.57
  3.71
  3.84
  3.95
  4.06
  4.15
  4.24
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.64
  4.67
  4.70
  4.73
  4.76
  4.78
  4.81
  4.83
  4.84
  4.86
Revenue, $m
  308
  314
  321
  330
  339
  349
  360
  373
  386
  400
  416
  432
  450
  468
  488
  509
  532
  555
  580
  607
  634
  664
  695
  728
  762
  798
  836
  877
  919
  964
  1,010
Variable operating expenses, $m
 
  108
  110
  112
  115
  118
  122
  125
  129
  133
  138
  128
  134
  139
  145
  151
  158
  165
  172
  180
  188
  197
  206
  216
  226
  237
  248
  260
  273
  286
  300
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
  264
  270
  276
  283
  290
  298
  306
  314
  323
  333
  327
  338
  349
  360
  371
  384
  396
  409
  423
  437
  452
  468
  484
  501
  519
  537
  556
  576
  597
  619
Operating income, $m
  54
  51
  52
  54
  56
  59
  63
  67
  72
  77
  83
  104
  112
  120
  128
  138
  148
  159
  171
  183
  197
  211
  227
  243
  261
  279
  299
  320
  343
  366
  392
EBITDA, $m
  85
  77
  79
  81
  84
  87
  91
  96
  101
  107
  114
  121
  129
  138
  147
  158
  169
  181
  193
  207
  222
  237
  254
  271
  290
  310
  332
  354
  378
  404
  431
Interest expense (income), $m
  0
  0
  0
  0
  1
  1
  1
  1
  1
  1
  2
  2
  2
  3
  3
  3
  4
  4
  4
  5
  5
  6
  6
  7
  7
  8
  8
  9
  10
  11
  11
Earnings before tax, $m
  54
  50
  52
  53
  56
  58
  62
  66
  70
  76
  81
  102
  109
  117
  126
  135
  145
  155
  167
  179
  192
  206
  221
  237
  254
  272
  291
  311
  333
  356
  380
Tax expense, $m
  7
  14
  14
  14
  15
  16
  17
  18
  19
  20
  22
  28
  30
  32
  34
  36
  39
  42
  45
  48
  52
  56
  60
  64
  68
  73
  79
  84
  90
  96
  103
Net income, $m
  47
  37
  38
  39
  41
  43
  45
  48
  51
  55
  59
  75
  80
  86
  92
  98
  106
  113
  122
  130
  140
  150
  161
  173
  185
  198
  212
  227
  243
  260
  278

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
  340
  347
  356
  366
  378
  390
  403
  417
  433
  449
  467
  486
  506
  528
  551
  575
  600
  627
  656
  686
  718
  751
  787
  824
  863
  904
  948
  994
  1,042
  1,092
Adjusted assets (=assets-cash), $m
  333
  340
  347
  356
  366
  378
  390
  403
  417
  433
  449
  467
  486
  506
  528
  551
  575
  600
  627
  656
  686
  718
  751
  787
  824
  863
  904
  948
  994
  1,042
  1,092
Revenue / Adjusted assets
  0.925
  0.924
  0.925
  0.927
  0.926
  0.923
  0.923
  0.926
  0.926
  0.924
  0.927
  0.925
  0.926
  0.925
  0.924
  0.924
  0.925
  0.925
  0.925
  0.925
  0.924
  0.925
  0.925
  0.925
  0.925
  0.925
  0.925
  0.925
  0.925
  0.925
  0.925
Average production assets, $m
  84
  85
  87
  89
  92
  95
  98
  101
  105
  108
  113
  117
  122
  127
  132
  138
  144
  150
  157
  164
  172
  180
  188
  197
  207
  216
  227
  238
  249
  261
  274
Working capital, $m
  48
  -39
  -40
  -41
  -42
  -43
  -44
  -46
  -47
  -49
  -51
  -53
  -55
  -58
  -60
  -63
  -65
  -68
  -71
  -75
  -78
  -82
  -85
  -89
  -94
  -98
  -103
  -108
  -113
  -119
  -124
Total debt, $m
  4
  7
  10
  14
  19
  24
  29
  35
  42
  49
  56
  64
  73
  82
  92
  102
  113
  124
  136
  149
  163
  177
  192
  208
  225
  242
  261
  281
  301
  323
  346
Total liabilities, $m
  151
  153
  156
  160
  165
  170
  175
  181
  188
  195
  202
  210
  219
  228
  238
  248
  259
  270
  282
  295
  309
  323
  338
  354
  371
  388
  407
  427
  447
  469
  492
Total equity, $m
  269
  187
  191
  196
  202
  208
  214
  222
  230
  238
  247
  257
  267
  278
  290
  303
  316
  330
  345
  361
  377
  395
  413
  433
  453
  475
  497
  521
  546
  573
  601
Total liabilities and equity, $m
  420
  340
  347
  356
  367
  378
  389
  403
  418
  433
  449
  467
  486
  506
  528
  551
  575
  600
  627
  656
  686
  718
  751
  787
  824
  863
  904
  948
  993
  1,042
  1,093
Debt-to-equity ratio
  0.015
  0.040
  0.050
  0.070
  0.090
  0.120
  0.140
  0.160
  0.180
  0.200
  0.230
  0.250
  0.270
  0.290
  0.320
  0.340
  0.360
  0.380
  0.390
  0.410
  0.430
  0.450
  0.460
  0.480
  0.500
  0.510
  0.520
  0.540
  0.550
  0.560
  0.580
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
  37
  38
  39
  41
  43
  45
  48
  51
  55
  59
  75
  80
  86
  92
  98
  106
  113
  122
  130
  140
  150
  161
  173
  185
  198
  212
  227
  243
  260
  278
Depreciation, amort., depletion, $m
  31
  27
  27
  27
  28
  28
  28
  29
  29
  30
  31
  17
  17
  18
  19
  20
  21
  21
  22
  23
  25
  26
  27
  28
  30
  31
  32
  34
  36
  37
  39
Funds from operations, $m
  33
  63
  65
  66
  68
  71
  74
  77
  81
  85
  90
  92
  97
  104
  111
  118
  126
  135
  144
  154
  165
  176
  188
  201
  215
  229
  245
  261
  279
  297
  317
Change in working capital, $m
  -27
  -1
  -1
  -1
  -1
  -1
  -1
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -3
  -3
  -3
  -3
  -3
  -3
  -4
  -4
  -4
  -4
  -4
  -5
  -5
  -5
  -5
  -6
Cash from operations, $m
  60
  64
  65
  67
  69
  72
  75
  79
  83
  87
  92
  94
  99
  106
  113
  121
  129
  138
  147
  157
  168
  180
  192
  205
  219
  234
  249
  266
  284
  303
  322
Maintenance CAPEX, $m
  0
  -12
  -12
  -12
  -13
  -13
  -14
  -14
  -14
  -15
  -15
  -16
  -17
  -17
  -18
  -19
  -20
  -21
  -21
  -22
  -23
  -25
  -26
  -27
  -28
  -30
  -31
  -32
  -34
  -36
  -37
New CAPEX, $m
  -5
  -2
  -2
  -2
  -3
  -3
  -3
  -3
  -4
  -4
  -4
  -4
  -5
  -5
  -5
  -6
  -6
  -6
  -7
  -7
  -8
  -8
  -8
  -9
  -9
  -10
  -10
  -11
  -11
  -12
  -13
Cash from investing activities, $m
  -64
  -14
  -14
  -14
  -16
  -16
  -17
  -17
  -18
  -19
  -19
  -20
  -22
  -22
  -23
  -25
  -26
  -27
  -28
  -29
  -31
  -33
  -34
  -36
  -37
  -40
  -41
  -43
  -45
  -48
  -50
Free cash flow, $m
  -4
  51
  51
  52
  54
  56
  58
  61
  64
  68
  72
  73
  78
  84
  90
  96
  103
  111
  119
  128
  137
  147
  158
  169
  181
  194
  208
  223
  238
  255
  272
Issuance/(repayment) of debt, $m
  0
  3
  4
  4
  5
  5
  5
  6
  6
  7
  7
  8
  9
  9
  10
  10
  11
  11
  12
  13
  14
  14
  15
  16
  17
  18
  19
  20
  21
  22
  23
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
  3
  4
  4
  5
  5
  5
  6
  6
  7
  7
  8
  9
  9
  10
  10
  11
  11
  12
  13
  14
  14
  15
  16
  17
  18
  19
  20
  21
  22
  23
Total cash flow (excl. dividends), $m
  -2
  54
  55
  56
  59
  61
  64
  67
  71
  75
  80
  81
  87
  93
  99
  106
  114
  122
  131
  140
  151
  161
  173
  185
  198
  212
  227
  242
  259
  277
  295
Retained Cash Flow (-), $m
  -26
  -4
  -4
  -5
  -6
  -6
  -7
  -7
  -8
  -9
  -9
  -10
  -10
  -11
  -12
  -13
  -13
  -14
  -15
  -16
  -17
  -17
  -18
  -19
  -20
  -22
  -23
  -24
  -25
  -26
  -28
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
 
  136
  51
  52
  53
  55
  57
  60
  63
  67
  71
  71
  76
  82
  87
  94
  101
  108
  116
  125
  134
  144
  154
  166
  178
  190
  204
  218
  234
  250
  267
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
 
  130
  46
  45
  44
  43
  42
  40
  39
  38
  37
  34
  32
  31
  29
  28
  26
  24
  21
  19
  17
  15
  13
  11
  9
  7
  6
  5
  4
  3
  2
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
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Enghouse Systems Limited develops enterprise software solutions for a range of vertical markets. The Company operates through two segments: the Interactive Management Group and the Asset Management Group. The Interactive Management Group specializes in customer interaction software and services that are designed to manage customer communications across the enterprise. Its technologies include contact center, attendant console, voice response, dialers, agent performance optimization and analytics that support telephony environment, deployed on premise or in the cloud. The Asset Management Group provides a range of products to telecom service providers, utilities, and the oil and gas industry. Its products include Operations Support Systems (OSS), Business Support Systems (BSS), Mobile Value Added Services (VAS) solutions and conversion services. The Asset Management Group also provides fleet routing, dispatch, scheduling, communications and emergency control center solutions.

FINANCIAL RATIOS  of  Enghouse Systems Limited (ENGH)

Valuation Ratios
P/E Ratio 29.9
Price to Sales 4.6
Price to Book 5.2
Price to Tangible Book
Price to Cash Flow 23.5
Price to Free Cash Flow 25.6
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 2% 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 26.908 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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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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