Intrinsic value of Magic Software Enterprises - MGIC

Previous Close

$8.65

  Intrinsic Value

$16.41

stock screener

  Rating & Target

str. buy

+90%

Previous close

$8.65

 
Intrinsic value

$16.41

 
Up/down potential

+90%

 
Rating

str. buy

We calculate the intrinsic value of MGIC 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

Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Shares outstanding, mln

 

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, %
  14.77
  22.20
  20.48
  18.93
  17.54
  16.28
  15.16
  14.14
  13.23
  12.40
  11.66
  11.00
  10.40
  9.86
  9.37
  8.93
  8.54
  8.19
  7.87
  7.58
  7.32
  7.09
  6.88
  6.69
  6.52
  6.37
  6.23
  6.11
  6.00
  5.90
  5.81
Revenue, $m
  202
  247
  297
  354
  416
  483
  557
  635
  719
  809
  903
  1,002
  1,107
  1,216
  1,330
  1,448
  1,572
  1,701
  1,835
  1,974
  2,118
  2,269
  2,425
  2,587
  2,756
  2,931
  3,114
  3,304
  3,503
  3,709
  3,925
Variable operating expenses, $m
 
  215
  258
  305
  357
  413
  474
  540
  611
  685
  764
  838
  925
  1,016
  1,111
  1,211
  1,314
  1,422
  1,534
  1,650
  1,771
  1,896
  2,027
  2,163
  2,304
  2,450
  2,603
  2,762
  2,928
  3,101
  3,281
Fixed operating expenses, $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
Total operating expenses, $m
  181
  215
  258
  305
  357
  413
  474
  540
  611
  685
  764
  838
  925
  1,016
  1,111
  1,211
  1,314
  1,422
  1,534
  1,650
  1,771
  1,896
  2,027
  2,163
  2,304
  2,450
  2,603
  2,762
  2,928
  3,101
  3,281
Operating income, $m
  21
  31
  40
  49
  59
  70
  82
  95
  109
  124
  139
  164
  182
  199
  218
  238
  258
  279
  301
  324
  348
  372
  398
  424
  452
  481
  511
  542
  575
  609
  644
EBITDA, $m
  33
  46
  56
  66
  78
  90
  104
  119
  134
  151
  169
  187
  207
  227
  248
  270
  293
  317
  342
  368
  395
  423
  453
  483
  514
  547
  581
  617
  654
  692
  733
Interest expense (income), $m
  0
  1
  2
  3
  4
  5
  7
  8
  10
  11
  13
  15
  17
  19
  21
  23
  26
  28
  31
  33
  36
  39
  42
  45
  48
  51
  55
  59
  62
  66
  70
Earnings before tax, $m
  21
  30
  38
  46
  55
  65
  76
  87
  99
  112
  126
  150
  165
  181
  197
  214
  232
  251
  270
  291
  311
  333
  356
  379
  404
  429
  456
  484
  512
  542
  574
Tax expense, $m
  4
  8
  10
  12
  15
  18
  20
  24
  27
  30
  34
  40
  44
  49
  53
  58
  63
  68
  73
  78
  84
  90
  96
  102
  109
  116
  123
  131
  138
  146
  155
Net income, $m
  12
  22
  28
  34
  40
  47
  55
  64
  73
  82
  92
  109
  120
  132
  144
  156
  170
  183
  197
  212
  227
  243
  260
  277
  295
  313
  333
  353
  374
  396
  419

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  88
  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
  316
  279
  336
  399
  469
  546
  628
  717
  812
  913
  1,019
  1,131
  1,249
  1,372
  1,501
  1,635
  1,774
  1,920
  2,071
  2,228
  2,391
  2,560
  2,737
  2,920
  3,110
  3,308
  3,515
  3,730
  3,953
  4,187
  4,430
Adjusted assets (=assets-cash), $m
  228
  279
  336
  399
  469
  546
  628
  717
  812
  913
  1,019
  1,131
  1,249
  1,372
  1,501
  1,635
  1,774
  1,920
  2,071
  2,228
  2,391
  2,560
  2,737
  2,920
  3,110
  3,308
  3,515
  3,730
  3,953
  4,187
  4,430
Revenue / Adjusted assets
  0.886
  0.885
  0.884
  0.887
  0.887
  0.885
  0.887
  0.886
  0.885
  0.886
  0.886
  0.886
  0.886
  0.886
  0.886
  0.886
  0.886
  0.886
  0.886
  0.886
  0.886
  0.886
  0.886
  0.886
  0.886
  0.886
  0.886
  0.886
  0.886
  0.886
  0.886
Average production assets, $m
  48
  58
  70
  83
  98
  114
  131
  149
  169
  190
  212
  236
  260
  286
  312
  340
  369
  400
  431
  464
  498
  533
  570
  608
  648
  689
  732
  777
  823
  872
  922
Working capital, $m
  113
  38
  46
  54
  64
  74
  85
  97
  110
  124
  138
  153
  169
  186
  203
  222
  241
  260
  281
  302
  324
  347
  371
  396
  422
  448
  476
  506
  536
  568
  600
Total debt, $m
  35
  54
  83
  115
  150
  188
  229
  274
  321
  371
  425
  481
  539
  601
  665
  732
  802
  875
  950
  1,029
  1,110
  1,195
  1,283
  1,375
  1,470
  1,569
  1,672
  1,780
  1,892
  2,008
  2,130
Total liabilities, $m
  120
  139
  168
  200
  235
  273
  314
  359
  406
  456
  510
  566
  624
  686
  750
  817
  887
  960
  1,035
  1,114
  1,195
  1,280
  1,368
  1,460
  1,555
  1,654
  1,757
  1,865
  1,977
  2,093
  2,215
Total equity, $m
  196
  139
  168
  200
  235
  273
  314
  359
  406
  456
  510
  566
  624
  686
  750
  817
  887
  960
  1,035
  1,114
  1,195
  1,280
  1,368
  1,460
  1,555
  1,654
  1,757
  1,865
  1,977
  2,093
  2,215
Total liabilities and equity, $m
  316
  278
  336
  400
  470
  546
  628
  718
  812
  912
  1,020
  1,132
  1,248
  1,372
  1,500
  1,634
  1,774
  1,920
  2,070
  2,228
  2,390
  2,560
  2,736
  2,920
  3,110
  3,308
  3,514
  3,730
  3,954
  4,186
  4,430
Debt-to-equity ratio
  0.179
  0.390
  0.490
  0.570
  0.640
  0.690
  0.730
  0.760
  0.790
  0.810
  0.830
  0.850
  0.860
  0.880
  0.890
  0.900
  0.900
  0.910
  0.920
  0.920
  0.930
  0.930
  0.940
  0.940
  0.950
  0.950
  0.950
  0.950
  0.960
  0.960
  0.960
Adjusted equity ratio
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  12
  22
  28
  34
  40
  47
  55
  64
  73
  82
  92
  109
  120
  132
  144
  156
  170
  183
  197
  212
  227
  243
  260
  277
  295
  313
  333
  353
  374
  396
  419
Depreciation, amort., depletion, $m
  12
  15
  16
  17
  18
  20
  22
  23
  25
  27
  30
  23
  25
  27
  30
  33
  36
  38
  41
  45
  48
  51
  55
  58
  62
  66
  70
  75
  79
  84
  89
Funds from operations, $m
  28
  37
  43
  51
  59
  67
  77
  87
  98
  109
  122
  132
  145
  159
  174
  189
  205
  222
  239
  257
  275
  295
  315
  335
  357
  380
  403
  428
  453
  480
  507
Change in working capital, $m
  0
  7
  8
  9
  9
  10
  11
  12
  13
  14
  14
  15
  16
  17
  17
  18
  19
  20
  20
  21
  22
  23
  24
  25
  26
  27
  28
  29
  30
  32
  33
Cash from operations, $m
  28
  30
  36
  42
  49
  57
  66
  75
  85
  96
  107
  117
  129
  143
  156
  171
  186
  202
  218
  235
  253
  272
  291
  311
  331
  353
  375
  399
  423
  448
  474
Maintenance CAPEX, $m
  0
  -5
  -6
  -7
  -8
  -9
  -11
  -13
  -14
  -16
  -18
  -20
  -23
  -25
  -27
  -30
  -33
  -36
  -38
  -41
  -45
  -48
  -51
  -55
  -58
  -62
  -66
  -70
  -75
  -79
  -84
New CAPEX, $m
  -5
  -11
  -12
  -13
  -15
  -16
  -17
  -18
  -20
  -21
  -22
  -23
  -24
  -26
  -27
  -28
  -29
  -30
  -31
  -33
  -34
  -35
  -37
  -38
  -40
  -41
  -43
  -45
  -47
  -49
  -51
Cash from investing activities, $m
  -36
  -16
  -18
  -20
  -23
  -25
  -28
  -31
  -34
  -37
  -40
  -43
  -47
  -51
  -54
  -58
  -62
  -66
  -69
  -74
  -79
  -83
  -88
  -93
  -98
  -103
  -109
  -115
  -122
  -128
  -135
Free cash flow, $m
  -8
  15
  18
  22
  27
  32
  38
  44
  51
  58
  67
  73
  82
  92
  102
  113
  124
  136
  148
  161
  175
  188
  203
  218
  233
  249
  266
  283
  302
  320
  340
Issuance/(repayment) of debt, $m
  32
  25
  29
  32
  35
  38
  41
  44
  47
  50
  53
  56
  59
  62
  64
  67
  70
  73
  76
  78
  82
  85
  88
  92
  95
  99
  103
  107
  112
  117
  122
Issuance/(repurchase) of shares, $m
  0
  3
  1
  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  
  30
  28
  30
  32
  35
  38
  41
  44
  47
  50
  53
  56
  59
  62
  64
  67
  70
  73
  76
  78
  82
  85
  88
  92
  95
  99
  103
  107
  112
  117
  122
Total cash flow (excl. dividends), $m
  21
  43
  48
  54
  62
  70
  79
  88
  98
  109
  120
  129
  141
  154
  167
  180
  194
  209
  224
  240
  256
  273
  291
  309
  328
  348
  369
  391
  413
  437
  462
Retained Cash Flow (-), $m
  -5
  -25
  -29
  -32
  -35
  -38
  -41
  -44
  -47
  -50
  -53
  -56
  -59
  -62
  -64
  -67
  -70
  -73
  -76
  -78
  -82
  -85
  -88
  -92
  -95
  -99
  -103
  -107
  -112
  -117
  -122
Prev. year cash balance distribution, $m
 
  82
  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
 
  100
  19
  22
  27
  32
  38
  44
  51
  58
  67
  73
  82
  92
  102
  113
  124
  136
  148
  161
  175
  188
  203
  218
  233
  249
  266
  283
  302
  320
  340
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
 
  96
  18
  19
  22
  25
  27
  30
  32
  34
  35
  35
  35
  35
  34
  33
  32
  30
  27
  25
  22
  19
  17
  14
  12
  10
  8
  6
  5
  3
  3
Current shareholders' claim on cash, %
  100
  98.6
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3
  98.3

Magic Software Enterprises Ltd. is a provider of application development, business process integration platforms, vertical software solutions and related professional services. The Company is a vendor of information technology (IT) outsourcing services. Its software technology is used by customers to develop, deploy and integrate on premise, mobile and cloud-based business. It operates through two segments: software solutions and IT professional services. The software services segment includes software technology and complementary services. The IT professional services segment offers IT services in the areas of infrastructure design and delivery, application development, technology planning and implementation services, and communications services and solutions. Its product portfolio includes Magic xpa Application Platform, AppBuilder Application Platform and Magic xpi Integration Platform. Its vertical software packages include Leap, Hermes Solution, HR Pulse and MBS Solution.

FINANCIAL RATIOS  of  Magic Software Enterprises (MGIC)

Valuation Ratios
P/E Ratio 32
Price to Sales 1.9
Price to Book 2
Price to Tangible Book
Price to Cash Flow 13.7
Price to Free Cash Flow 16.7
Growth Rates
Sales Growth Rate 14.8%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 0%
Cap. Spend. - 3 Yr. Gr. Rate 0%
Financial Strength
Quick Ratio 15
Current Ratio 0
LT Debt to Equity 14.8%
Total Debt to Equity 17.9%
Interest Coverage 0
Management Effectiveness
Return On Assets 4.3%
Ret/ On Assets - 3 Yr. Avg. 6.5%
Return On Total Capital 5.6%
Ret/ On T. Cap. - 3 Yr. Avg. 8%
Return On Equity 6.2%
Return On Equity - 3 Yr. Avg. 8.3%
Asset Turnover 0.7
Profitability Ratios
Gross Margin 33.7%
Gross Margin - 3 Yr. Avg. 36.4%
EBITDA Margin 16.3%
EBITDA Margin - 3 Yr. Avg. 17%
Operating Margin 10.4%
Oper. Margin - 3 Yr. Avg. 11.5%
Pre-Tax Margin 10.4%
Pre-Tax Margin - 3 Yr. Avg. 11.3%
Net Profit Margin 5.9%
Net Profit Margin - 3 Yr. Avg. 8.3%
Effective Tax Rate 19%
Eff/ Tax Rate - 3 Yr. Avg. 16.2%
Payout Ratio 66.7%

MGIC stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the MGIC stock intrinsic value calculation we used $202 million for the last fiscal year's total revenue generated by Magic Software Enterprises. The default revenue input number comes from 2016 income statement of Magic Software Enterprises. 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 MGIC stock valuation model: a) initial revenue growth rate of 22.2% 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 MGIC is calculated based on our internal credit rating of Magic Software Enterprises, 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 Magic Software Enterprises.
    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 MGIC stock the variable cost ratio is equal to 88.1%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for MGIC 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 Magic Software Enterprises.

Corporate tax rate of 27% is the nominal tax rate for Magic Software Enterprises. 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 MGIC 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 MGIC are equal to 23.5%.

Life of production assets of 10.4 years is the average useful life of capital assets used in Magic Software Enterprises 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 MGIC is equal to 15.3%. 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 - $196 million for Magic Software Enterprises - 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 44.742 million for Magic Software Enterprises 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 Magic Software Enterprises at the current share price and the inputted number of shares is $0.4 billion.

RELATED COMPANIES Price Int.Val. Rating
IBM International 162.37 173.04  hold
SAP SAP ADR 113.20 85.52  sell
ORCL Oracle 50.58 36.10  sell
FORTY Formula System 44.00 478.95  str.buy
MSFT Microsoft 90.00 55.03  sell
ERIC Ericsson ADR 7.29 6.44  hold
HPE Hewlett Packar 16.08 68.58  str.buy
MNDO MIND C.T.I. 2.73 4.19  str.buy
CRM Salesforce.com 111.93 86.43  hold

COMPANY NEWS

▶ Magic Software Enterprises Ltd. to Host Earnings Call   [Nov-14-17 07:10AM  ACCESSWIRE]
▶ Magic Software posts 3Q profit   [05:01AM  Associated Press]
▶ When Should You Buy Magic Software Enterprises Ltd (MGIC)?   [Sep-19-17 10:45AM  Simply Wall St.]
▶ 3 Dividend-Yielding Tech Stocks to Buy Now   [Sep-14-17 01:57PM  Zacks]
▶ Magic Software posts 2Q profit   [Aug-09-17 11:00PM  Associated Press]
▶ Magic Software posts 1Q profit   [05:48AM  Associated Press]
▶ Magic Software posts 4Q profit   [Feb-21-17 07:52AM  Associated Press]
▶ Magic Software meets 2Q profit forecasts   [Aug-10-16 05:17AM  AP]
▶ Magic Software misses 1Q profit forecasts   [May-09-16 06:28AM  AP]
▶ MAGIC SOFTWARE ENTERPRISES LTD Financials   [May-03-16 01:04PM  EDGAR Online Financials]
Financial statements of MGIC
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.

FREE DOWNLOAD
Follow us on:   twitter   twitter   twitter   twitter

ASSET ALLOCATION

About X-FIN       Site news       Privacy policy       Terms of use       FAQ

Copyright © X-FIN.com 2005-2018. All rigths reserved.