Intrinsic value of Formula Systems (1985) Ltd. - FORTY

Previous Close

$61.87

  Intrinsic Value

$256.14

stock screener

  Rating & Target

str. buy

+314%

Previous close

$61.87

 
Intrinsic value

$256.14

 
Up/down potential

+314%

 
Rating

str. buy

We calculate the intrinsic value of FORTY 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 0001), $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 0.9

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
   2
   3
   4
   5
   6
   7
   8
   9
   10
   11
   12
   13
   14
   15
   16
   17
   18
   19
   20
   21
   22
   23
   24
   25
   26
   27
   28
   29
   30
   31

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  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
  1,656
  1,995
  2,373
  2,789
  3,243
  3,734
  4,262
  4,826
  5,425
  6,058
  6,724
  7,423
  8,155
  8,919
  9,716
  10,546
  11,409
  12,307
  13,240
  14,209
  15,217
  16,264
  17,353
  18,485
  19,663
  20,889
  22,165
  23,495
  24,882
  26,327
Variable operating expenses, $m
  1,523
  1,834
  2,181
  2,562
  2,979
  3,430
  3,915
  4,432
  4,982
  5,563
  6,171
  6,813
  7,484
  8,186
  8,917
  9,679
  10,471
  11,295
  12,151
  13,041
  13,966
  14,927
  15,926
  16,965
  18,046
  19,171
  20,343
  21,564
  22,836
  24,163
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
  1,523
  1,834
  2,181
  2,562
  2,979
  3,430
  3,915
  4,432
  4,982
  5,563
  6,171
  6,813
  7,484
  8,186
  8,917
  9,679
  10,471
  11,295
  12,151
  13,041
  13,966
  14,927
  15,926
  16,965
  18,046
  19,171
  20,343
  21,564
  22,836
  24,163
Operating income, $m
  133
  161
  192
  226
  264
  304
  347
  394
  443
  495
  553
  610
  670
  733
  799
  867
  938
  1,012
  1,088
  1,168
  1,251
  1,337
  1,427
  1,520
  1,617
  1,717
  1,822
  1,932
  2,046
  2,164
EBITDA, $m
  164
  197
  235
  276
  321
  370
  422
  478
  537
  600
  666
  735
  807
  883
  962
  1,044
  1,129
  1,218
  1,310
  1,406
  1,506
  1,610
  1,718
  1,830
  1,946
  2,068
  2,194
  2,326
  2,463
  2,606
Interest expense (income), $m
  7
  19
  33
  49
  67
  87
  109
  133
  158
  185
  214
  244
  276
  310
  345
  381
  420
  459
  501
  544
  589
  635
  683
  734
  786
  840
  897
  955
  1,017
  1,080
  1,147
Earnings before tax, $m
  115
  128
  143
  159
  176
  195
  215
  236
  258
  281
  309
  334
  361
  389
  417
  447
  479
  511
  545
  580
  616
  654
  693
  734
  776
  821
  867
  915
  965
  1,018
Tax expense, $m
  31
  35
  39
  43
  48
  53
  58
  64
  70
  76
  83
  90
  97
  105
  113
  121
  129
  138
  147
  157
  166
  177
  187
  198
  210
  222
  234
  247
  261
  275
Net income, $m
  84
  93
  104
  116
  129
  142
  157
  172
  188
  205
  225
  244
  263
  284
  305
  327
  349
  373
  398
  423
  450
  477
  506
  536
  567
  599
  633
  668
  705
  743

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $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 assets, $m
  1,910
  2,301
  2,737
  3,217
  3,740
  4,307
  4,916
  5,567
  6,257
  6,987
  7,755
  8,562
  9,406
  10,287
  11,206
  12,163
  13,159
  14,195
  15,271
  16,389
  17,551
  18,759
  20,015
  21,321
  22,679
  24,093
  25,566
  27,100
  28,699
  30,366
Adjusted assets (=assets-cash), $m
  1,910
  2,301
  2,737
  3,217
  3,740
  4,307
  4,916
  5,567
  6,257
  6,987
  7,755
  8,562
  9,406
  10,287
  11,206
  12,163
  13,159
  14,195
  15,271
  16,389
  17,551
  18,759
  20,015
  21,321
  22,679
  24,093
  25,566
  27,100
  28,699
  30,366
Revenue / Adjusted assets
  0.867
  0.867
  0.867
  0.867
  0.867
  0.867
  0.867
  0.867
  0.867
  0.867
  0.867
  0.867
  0.867
  0.867
  0.867
  0.867
  0.867
  0.867
  0.867
  0.867
  0.867
  0.867
  0.867
  0.867
  0.867
  0.867
  0.867
  0.867
  0.867
  0.867
Average production assets, $m
  464
  559
  664
  781
  908
  1,046
  1,193
  1,351
  1,519
  1,696
  1,883
  2,078
  2,283
  2,497
  2,720
  2,953
  3,195
  3,446
  3,707
  3,979
  4,261
  4,554
  4,859
  5,176
  5,506
  5,849
  6,206
  6,579
  6,967
  7,372
Working capital, $m
  94
  114
  135
  159
  185
  213
  243
  275
  309
  345
  383
  423
  465
  508
  554
  601
  650
  701
  755
  810
  867
  927
  989
  1,054
  1,121
  1,191
  1,263
  1,339
  1,418
  1,501
Total debt, $m
  611
  912
  1,248
  1,617
  2,021
  2,457
  2,926
  3,427
  3,958
  4,520
  5,112
  5,733
  6,383
  7,062
  7,769
  8,506
  9,273
  10,070
  10,899
  11,760
  12,655
  13,585
  14,552
  15,558
  16,604
  17,692
  18,826
  20,007
  21,238
  22,522
Total liabilities, $m
  1,471
  1,772
  2,107
  2,477
  2,880
  3,317
  3,786
  4,286
  4,818
  5,380
  5,972
  6,592
  7,242
  7,921
  8,629
  9,366
  10,133
  10,930
  11,758
  12,620
  13,514
  14,445
  15,411
  16,417
  17,463
  18,552
  19,686
  20,867
  22,098
  23,382
Total equity, $m
  439
  529
  629
  740
  860
  991
  1,131
  1,280
  1,439
  1,607
  1,784
  1,969
  2,163
  2,366
  2,577
  2,798
  3,027
  3,265
  3,512
  3,769
  4,037
  4,315
  4,603
  4,904
  5,216
  5,541
  5,880
  6,233
  6,601
  6,984
Total liabilities and equity, $m
  1,910
  2,301
  2,736
  3,217
  3,740
  4,308
  4,917
  5,566
  6,257
  6,987
  7,756
  8,561
  9,405
  10,287
  11,206
  12,164
  13,160
  14,195
  15,270
  16,389
  17,551
  18,760
  20,014
  21,321
  22,679
  24,093
  25,566
  27,100
  28,699
  30,366
Debt-to-equity ratio
  1.390
  1.720
  1.980
  2.190
  2.350
  2.480
  2.590
  2.680
  2.750
  2.810
  2.870
  2.910
  2.950
  2.980
  3.010
  3.040
  3.060
  3.080
  3.100
  3.120
  3.130
  3.150
  3.160
  3.170
  3.180
  3.190
  3.200
  3.210
  3.220
  3.220
Adjusted equity ratio
  0.230
  0.230
  0.230
  0.230
  0.230
  0.230
  0.230
  0.230
  0.230
  0.230
  0.230
  0.230
  0.230
  0.230
  0.230
  0.230
  0.230
  0.230
  0.230
  0.230
  0.230
  0.230
  0.230
  0.230
  0.230
  0.230
  0.230
  0.230
  0.230
  0.230

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  84
  93
  104
  116
  129
  142
  157
  172
  188
  205
  225
  244
  263
  284
  305
  327
  349
  373
  398
  423
  450
  477
  506
  536
  567
  599
  633
  668
  705
  743
Depreciation, amort., depletion, $m
  31
  36
  43
  50
  57
  66
  74
  84
  94
  105
  113
  124
  137
  150
  163
  177
  191
  206
  222
  238
  255
  273
  291
  310
  330
  350
  372
  394
  417
  441
Funds from operations, $m
  114
  130
  147
  166
  186
  208
  231
  256
  282
  310
  338
  368
  400
  433
  468
  503
  541
  579
  620
  661
  705
  750
  797
  846
  896
  949
  1,004
  1,062
  1,122
  1,184
Change in working capital, $m
  17
  19
  22
  24
  26
  28
  30
  32
  34
  36
  38
  40
  42
  44
  45
  47
  49
  51
  53
  55
  57
  60
  62
  65
  67
  70
  73
  76
  79
  82
Cash from operations, $m
  97
  111
  125
  142
  160
  180
  201
  224
  248
  274
  300
  329
  358
  390
  422
  456
  491
  528
  566
  606
  647
  690
  735
  781
  829
  880
  932
  986
  1,043
  1,102
Maintenance CAPEX, $m
  -23
  -28
  -33
  -40
  -47
  -54
  -63
  -71
  -81
  -91
  -102
  -113
  -124
  -137
  -150
  -163
  -177
  -191
  -206
  -222
  -238
  -255
  -273
  -291
  -310
  -330
  -350
  -372
  -394
  -417
New CAPEX, $m
  -84
  -95
  -106
  -117
  -127
  -138
  -148
  -158
  -168
  -177
  -187
  -196
  -205
  -214
  -223
  -232
  -242
  -251
  -261
  -271
  -282
  -293
  -305
  -317
  -330
  -343
  -357
  -372
  -388
  -405
Cash from investing activities, $m
  -107
  -123
  -139
  -157
  -174
  -192
  -211
  -229
  -249
  -268
  -289
  -309
  -329
  -351
  -373
  -395
  -419
  -442
  -467
  -493
  -520
  -548
  -578
  -608
  -640
  -673
  -707
  -744
  -782
  -822
Free cash flow, $m
  -10
  -12
  -14
  -14
  -14
  -12
  -9
  -5
  0
  6
  12
  20
  29
  39
  50
  61
  73
  86
  99
  113
  127
  142
  157
  173
  190
  207
  224
  242
  261
  280
Issuance/(repayment) of debt, $m
  266
  301
  335
  370
  403
  437
  469
  501
  532
  562
  592
  621
  650
  679
  708
  737
  767
  797
  829
  861
  895
  930
  967
  1,006
  1,046
  1,089
  1,134
  1,181
  1,231
  1,284
Issuance/(repurchase) of shares, $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 from financing (excl. dividends), $m  
  266
  301
  335
  370
  403
  437
  469
  501
  532
  562
  592
  621
  650
  679
  708
  737
  767
  797
  829
  861
  895
  930
  967
  1,006
  1,046
  1,089
  1,134
  1,181
  1,231
  1,284
Total cash flow (excl. dividends), $m
  256
  289
  322
  355
  390
  424
  460
  495
  531
  568
  604
  641
  679
  718
  757
  798
  840
  883
  927
  974
  1,022
  1,072
  1,124
  1,179
  1,236
  1,295
  1,358
  1,423
  1,492
  1,564
Retained Cash Flow (-), $m
  -80
  -90
  -100
  -110
  -120
  -130
  -140
  -150
  -159
  -168
  -177
  -185
  -194
  -203
  -211
  -220
  -229
  -238
  -248
  -257
  -267
  -278
  -289
  -300
  -312
  -325
  -339
  -353
  -368
  -384
Prev. year cash balance distribution, $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 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
  176
  199
  222
  245
  269
  294
  320
  346
  372
  400
  427
  456
  485
  515
  546
  578
  611
  645
  680
  717
  755
  794
  835
  878
  923
  970
  1,019
  1,070
  1,124
  1,180
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
  169
  182
  193
  202
  209
  213
  216
  216
  214
  210
  203
  194
  184
  173
  160
  147
  133
  119
  105
  91
  78
  66
  55
  45
  36
  28
  22
  17
  12
  9
Current shareholders' claim on cash, %
  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
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Formula Systems (1985) Ltd. (Formula) is a global information technology (IT) solutions and services holding company. The Company, through its directly held subsidiary and affiliated companies, is engaged in providing software solutions and services, software product marketing and support, computer infrastructure and integration solutions, and learning and integration. The Company operates through two segments: software services and IT professional services. The software services segment develops markets, sells and supports an application platform, software applications, business and process integration solutions, and related services. The IT professional services segment offers IT services in the areas of infrastructure design and delivery, application development, technology planning and implementation services, communications services and solutions, as well as supplemental outsourcing services.

FINANCIAL RATIOS  of  Formula Systems (1985) Ltd. (FORTY)

Valuation Ratios
P/E Ratio 41.4
Price to Sales 0.8
Price to Book 2.7
Price to Tangible Book
Price to Cash Flow 12.2
Price to Free Cash Flow 16.3
Growth Rates
Sales Growth Rate 14%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 11.8%
Cap. Spend. - 3 Yr. Gr. Rate 2.2%
Financial Strength
Quick Ratio 3
Current Ratio 0
LT Debt to Equity 50.9%
Total Debt to Equity 77.1%
Interest Coverage 12
Management Effectiveness
Return On Assets 2.1%
Ret/ On Assets - 3 Yr. Avg. 4.2%
Return On Total Capital 3.8%
Ret/ On T. Cap. - 3 Yr. Avg. 8.1%
Return On Equity 6.6%
Return On Equity - 3 Yr. Avg. 11.7%
Asset Turnover 0.9
Profitability Ratios
Gross Margin 23.4%
Gross Margin - 3 Yr. Avg. 21.3%
EBITDA Margin 10.5%
EBITDA Margin - 3 Yr. Avg. 9.3%
Operating Margin 8%
Oper. Margin - 3 Yr. Avg. 7.1%
Pre-Tax Margin 6.9%
Pre-Tax Margin - 3 Yr. Avg. 6.1%
Net Profit Margin 2%
Net Profit Margin - 3 Yr. Avg. 5.6%
Effective Tax Rate 27.3%
Eff/ Tax Rate - 3 Yr. Avg. 28.3%
Payout Ratio 45.5%

FORTY stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the FORTY stock intrinsic value calculation we used $1355 million for the last fiscal year's total revenue generated by Formula Systems (1985) Ltd.. The default revenue input number comes from 0001 income statement of Formula Systems (1985) Ltd.. 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 FORTY 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 FORTY is calculated based on our internal credit rating of Formula Systems (1985) Ltd., 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 Formula Systems (1985) Ltd..
    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 FORTY stock the variable cost ratio is equal to 92%.

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 FORTY 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 5.4% for Formula Systems (1985) Ltd..

Corporate tax rate of 27% is the nominal tax rate for Formula Systems (1985) Ltd.. 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 FORTY 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 FORTY are equal to 28%.

Life of production assets of 16.7 years is the average useful life of capital assets used in Formula Systems (1985) Ltd. 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 FORTY is equal to 5.7%. 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 - $359.202 million for Formula Systems (1985) Ltd. - 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 15.294 million for Formula Systems (1985) Ltd. 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 Formula Systems (1985) Ltd. at the current share price and the inputted number of shares is $0.9 billion.

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