Intrinsic value of Magic Software Enterprises - MGIC

Previous Close

$8.70

  Intrinsic Value

$10.38

stock screener

  Rating & Target

hold

+19%

Previous close

$8.70

 
Intrinsic value

$10.38

 
Up/down potential

+19%

 
Rating

hold

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

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 0.4

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
   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, %
  14.60
  13.64
  12.78
  12.00
  11.30
  10.67
  10.10
  9.59
  9.13
  8.72
  8.35
  8.01
  7.71
  7.44
  7.20
  6.98
  6.78
  6.60
  6.44
  6.30
  6.17
  6.05
  5.95
  5.85
  5.77
  5.69
  5.62
  5.56
  5.50
  5.45
Revenue, $m
  231
  263
  297
  332
  370
  409
  451
  494
  539
  586
  635
  686
  739
  794
  851
  910
  972
  1,036
  1,103
  1,172
  1,244
  1,319
  1,398
  1,480
  1,565
  1,654
  1,747
  1,844
  1,946
  2,052
Variable operating expenses, $m
  201
  227
  254
  282
  312
  344
  378
  412
  449
  487
  511
  552
  595
  639
  685
  733
  782
  834
  888
  944
  1,002
  1,062
  1,126
  1,192
  1,260
  1,332
  1,407
  1,485
  1,567
  1,652
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
  201
  227
  254
  282
  312
  344
  378
  412
  449
  487
  511
  552
  595
  639
  685
  733
  782
  834
  888
  944
  1,002
  1,062
  1,126
  1,192
  1,260
  1,332
  1,407
  1,485
  1,567
  1,652
Operating income, $m
  30
  37
  43
  50
  57
  65
  73
  81
  90
  99
  124
  134
  144
  155
  166
  177
  189
  202
  215
  228
  242
  257
  272
  288
  305
  322
  340
  359
  379
  400
EBITDA, $m
  59
  67
  76
  85
  95
  105
  116
  127
  138
  150
  163
  176
  189
  204
  218
  233
  249
  266
  283
  301
  319
  339
  359
  380
  402
  424
  448
  473
  499
  526
Interest expense (income), $m
  0
  2
  3
  3
  5
  6
  7
  8
  9
  11
  12
  13
  15
  16
  18
  20
  21
  23
  25
  27
  29
  31
  34
  36
  38
  41
  43
  46
  49
  52
  55
Earnings before tax, $m
  29
  34
  40
  46
  52
  58
  65
  72
  80
  87
  110
  119
  127
  137
  146
  156
  166
  177
  188
  199
  211
  223
  236
  250
  264
  279
  294
  310
  327
  345
Tax expense, $m
  8
  9
  11
  12
  14
  16
  18
  20
  22
  24
  30
  32
  34
  37
  39
  42
  45
  48
  51
  54
  57
  60
  64
  67
  71
  75
  79
  84
  88
  93
Net income, $m
  21
  25
  29
  33
  38
  43
  48
  53
  58
  64
  81
  87
  93
  100
  107
  114
  121
  129
  137
  145
  154
  163
  173
  182
  193
  204
  215
  226
  239
  252

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
  314
  356
  402
  450
  501
  555
  611
  669
  730
  794
  860
  929
  1,001
  1,075
  1,153
  1,233
  1,317
  1,404
  1,494
  1,588
  1,686
  1,788
  1,894
  2,005
  2,121
  2,241
  2,367
  2,499
  2,636
  2,780
Adjusted assets (=assets-cash), $m
  314
  356
  402
  450
  501
  555
  611
  669
  730
  794
  860
  929
  1,001
  1,075
  1,153
  1,233
  1,317
  1,404
  1,494
  1,588
  1,686
  1,788
  1,894
  2,005
  2,121
  2,241
  2,367
  2,499
  2,636
  2,780
Revenue / Adjusted assets
  0.736
  0.739
  0.739
  0.738
  0.739
  0.737
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.739
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
Average production assets, $m
  143
  163
  183
  205
  229
  253
  278
  305
  333
  362
  392
  424
  456
  490
  526
  562
  600
  640
  681
  724
  769
  815
  864
  914
  967
  1,022
  1,080
  1,140
  1,202
  1,268
Working capital, $m
  -10
  -11
  -12
  -14
  -16
  -17
  -19
  -21
  -23
  -25
  -27
  -29
  -31
  -33
  -36
  -38
  -41
  -44
  -46
  -49
  -52
  -55
  -59
  -62
  -66
  -69
  -73
  -77
  -82
  -86
Total debt, $m
  46
  64
  83
  104
  125
  147
  171
  195
  221
  248
  275
  304
  334
  366
  398
  432
  467
  503
  541
  580
  621
  664
  709
  755
  804
  854
  907
  962
  1,020
  1,080
Total liabilities, $m
  131
  149
  168
  189
  210
  232
  256
  280
  306
  333
  360
  389
  419
  451
  483
  517
  552
  588
  626
  665
  706
  749
  794
  840
  889
  939
  992
  1,047
  1,105
  1,165
Total equity, $m
  182
  207
  234
  262
  291
  322
  355
  389
  424
  461
  500
  540
  581
  625
  670
  716
  765
  815
  868
  923
  980
  1,039
  1,101
  1,165
  1,232
  1,302
  1,375
  1,452
  1,532
  1,615
Total liabilities and equity, $m
  313
  356
  402
  451
  501
  554
  611
  669
  730
  794
  860
  929
  1,000
  1,076
  1,153
  1,233
  1,317
  1,403
  1,494
  1,588
  1,686
  1,788
  1,895
  2,005
  2,121
  2,241
  2,367
  2,499
  2,637
  2,780
Debt-to-equity ratio
  0.250
  0.310
  0.360
  0.400
  0.430
  0.460
  0.480
  0.500
  0.520
  0.540
  0.550
  0.560
  0.570
  0.590
  0.590
  0.600
  0.610
  0.620
  0.620
  0.630
  0.630
  0.640
  0.640
  0.650
  0.650
  0.660
  0.660
  0.660
  0.670
  0.670
Adjusted equity ratio
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  21
  25
  29
  33
  38
  43
  48
  53
  58
  64
  81
  87
  93
  100
  107
  114
  121
  129
  137
  145
  154
  163
  173
  182
  193
  204
  215
  226
  239
  252
Depreciation, amort., depletion, $m
  29
  31
  33
  35
  38
  40
  43
  45
  48
  51
  39
  42
  46
  49
  53
  56
  60
  64
  68
  72
  77
  82
  86
  91
  97
  102
  108
  114
  120
  127
Funds from operations, $m
  50
  56
  62
  68
  75
  83
  90
  98
  106
  115
  120
  129
  139
  149
  159
  170
  181
  193
  205
  218
  231
  245
  259
  274
  289
  306
  323
  340
  359
  378
Change in working capital, $m
  -1
  -1
  -1
  -1
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -3
  -3
  -3
  -3
  -3
  -3
  -3
  -3
  -4
  -4
  -4
  -4
  -4
  -4
Cash from operations, $m
  51
  57
  63
  70
  77
  84
  92
  100
  108
  117
  122
  131
  141
  151
  162
  172
  184
  196
  208
  221
  234
  248
  262
  277
  293
  309
  327
  345
  363
  383
Maintenance CAPEX, $m
  -12
  -14
  -16
  -18
  -21
  -23
  -25
  -28
  -31
  -33
  -36
  -39
  -42
  -46
  -49
  -53
  -56
  -60
  -64
  -68
  -72
  -77
  -82
  -86
  -91
  -97
  -102
  -108
  -114
  -120
New CAPEX, $m
  -18
  -20
  -21
  -22
  -23
  -24
  -26
  -27
  -28
  -29
  -30
  -31
  -33
  -34
  -35
  -37
  -38
  -40
  -41
  -43
  -45
  -47
  -48
  -51
  -53
  -55
  -57
  -60
  -63
  -66
Cash from investing activities, $m
  -30
  -34
  -37
  -40
  -44
  -47
  -51
  -55
  -59
  -62
  -66
  -70
  -75
  -80
  -84
  -90
  -94
  -100
  -105
  -111
  -117
  -124
  -130
  -137
  -144
  -152
  -159
  -168
  -177
  -186
Free cash flow, $m
  20
  23
  26
  30
  33
  37
  41
  45
  50
  54
  55
  60
  66
  71
  77
  83
  89
  96
  103
  110
  117
  124
  132
  140
  149
  158
  167
  177
  187
  197
Issuance/(repayment) of debt, $m
  17
  18
  19
  20
  21
  22
  23
  25
  26
  27
  28
  29
  30
  31
  32
  34
  35
  36
  38
  39
  41
  43
  45
  46
  48
  51
  53
  55
  58
  60
Issuance/(repurchase) of shares, $m
  3
  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  
  20
  18
  19
  20
  21
  22
  23
  25
  26
  27
  28
  29
  30
  31
  32
  34
  35
  36
  38
  39
  41
  43
  45
  46
  48
  51
  53
  55
  58
  60
Total cash flow (excl. dividends), $m
  40
  41
  45
  50
  54
  59
  64
  70
  75
  81
  83
  89
  96
  103
  110
  117
  124
  132
  141
  149
  158
  167
  177
  187
  197
  208
  220
  232
  244
  257
Retained Cash Flow (-), $m
  -24
  -25
  -26
  -28
  -30
  -31
  -33
  -34
  -36
  -37
  -39
  -40
  -42
  -43
  -45
  -47
  -49
  -50
  -53
  -55
  -57
  -59
  -62
  -64
  -67
  -70
  -73
  -76
  -80
  -84
Prev. year cash balance distribution, $m
  37
  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
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  2
  2
  2
  2
  2
Cash available for distribution, $m
  54
  16
  19
  22
  25
  28
  32
  36
  40
  44
  45
  49
  54
  59
  65
  70
  76
  82
  88
  94
  101
  108
  115
  122
  130
  138
  147
  155
  164
  174
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
  51
  15
  16
  18
  19
  21
  22
  22
  23
  23
  21
  21
  21
  20
  19
  18
  17
  15
  14
  12
  10
  9
  8
  6
  5
  4
  3
  2
  2
  1
Current shareholders' claim on cash, %
  99.1
  99.1
  99.1
  99.1
  99.1
  99.1
  99.1
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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 32.2
Price to Sales 1.9
Price to Book 2
Price to Tangible Book
Price to Cash Flow 13.8
Price to Free Cash Flow 16.8
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 14.6% 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 87.8%.

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 5.4% 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 0.1%.

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 61.8%.

Life of production assets of 10 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 -4.2%. 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 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.

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COMPANY NEWS

▶ Magic Software Enterprises Ltd. to Host Earnings Call   [Aug-08-18 08:00AM  ACCESSWIRE]
▶ Magic Software: 2Q Earnings Snapshot   [05:06AM  Associated Press]
▶ Magic Software: 1Q Earnings Snapshot   [May-16-18 05:08AM  Associated Press]
▶ Magic Software Announces Filing of 2017 Annual Report   [May-01-18 06:10AM  PR Newswire]
▶ Magic Software posts 4Q profit   [Feb-28-18 10:04AM  Associated Press]
▶ 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]
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