Intrinsic value of Magic Software Enterprises Ltd. - MGIC

Previous Close

$8.45

  Intrinsic Value

$10.99

stock screener

  Rating & Target

buy

+30%

Previous close

$8.45

 
Intrinsic value

$10.99

 
Up/down potential

+30%

 
Rating

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

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 0.4

 

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, %
  28.00
  25.70
  23.63
  21.77
  20.09
  18.58
  17.22
  16.00
  14.90
  13.91
  13.02
  12.22
  11.50
  10.85
  10.26
  9.74
  9.26
  8.84
  8.45
  8.11
  7.80
  7.52
  7.26
  7.04
  6.83
  6.65
  6.49
  6.34
  6.20
  6.08
Revenue, $m
  330
  415
  513
  625
  750
  890
  1,043
  1,210
  1,390
  1,584
  1,790
  2,009
  2,240
  2,483
  2,737
  3,004
  3,282
  3,572
  3,874
  4,188
  4,514
  4,854
  5,206
  5,573
  5,954
  6,350
  6,762
  7,190
  7,636
  8,101
Variable operating expenses, $m
  291
  362
  445
  538
  643
  760
  888
  1,028
  1,179
  1,341
  1,499
  1,682
  1,875
  2,079
  2,292
  2,515
  2,748
  2,991
  3,243
  3,506
  3,780
  4,064
  4,359
  4,666
  4,985
  5,316
  5,661
  6,020
  6,393
  6,782
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
  291
  362
  445
  538
  643
  760
  888
  1,028
  1,179
  1,341
  1,499
  1,682
  1,875
  2,079
  2,292
  2,515
  2,748
  2,991
  3,243
  3,506
  3,780
  4,064
  4,359
  4,666
  4,985
  5,316
  5,661
  6,020
  6,393
  6,782
Operating income, $m
  39
  53
  69
  87
  107
  130
  155
  182
  211
  243
  291
  327
  365
  404
  446
  489
  534
  581
  630
  682
  735
  790
  847
  907
  969
  1,033
  1,100
  1,170
  1,243
  1,318
EBITDA, $m
  63
  79
  97
  119
  142
  169
  198
  230
  264
  301
  340
  381
  425
  471
  519
  570
  623
  678
  735
  795
  857
  921
  988
  1,058
  1,130
  1,205
  1,283
  1,365
  1,449
  1,537
Interest expense (income), $m
  0
  2
  4
  6
  9
  11
  15
  18
  22
  26
  31
  36
  41
  47
  53
  59
  66
  72
  80
  87
  95
  103
  111
  120
  129
  138
  148
  158
  169
  180
  191
Earnings before tax, $m
  37
  49
  63
  78
  96
  115
  137
  160
  185
  212
  255
  286
  318
  351
  386
  423
  462
  502
  543
  587
  632
  679
  727
  778
  831
  885
  942
  1,001
  1,063
  1,127
Tax expense, $m
  10
  13
  17
  21
  26
  31
  37
  43
  50
  57
  69
  77
  86
  95
  104
  114
  125
  135
  147
  158
  171
  183
  196
  210
  224
  239
  254
  270
  287
  304
Net income, $m
  27
  36
  46
  57
  70
  84
  100
  117
  135
  155
  186
  208
  232
  256
  282
  309
  337
  366
  397
  428
  461
  496
  531
  568
  606
  646
  688
  731
  776
  823

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
  385
  484
  599
  729
  876
  1,038
  1,217
  1,412
  1,622
  1,848
  2,089
  2,344
  2,613
  2,897
  3,194
  3,505
  3,830
  4,168
  4,520
  4,887
  5,268
  5,664
  6,075
  6,503
  6,947
  7,409
  7,890
  8,390
  8,910
  9,452
Adjusted assets (=assets-cash), $m
  385
  484
  599
  729
  876
  1,038
  1,217
  1,412
  1,622
  1,848
  2,089
  2,344
  2,613
  2,897
  3,194
  3,505
  3,830
  4,168
  4,520
  4,887
  5,268
  5,664
  6,075
  6,503
  6,947
  7,409
  7,890
  8,390
  8,910
  9,452
Revenue / Adjusted assets
  0.857
  0.857
  0.856
  0.857
  0.856
  0.857
  0.857
  0.857
  0.857
  0.857
  0.857
  0.857
  0.857
  0.857
  0.857
  0.857
  0.857
  0.857
  0.857
  0.857
  0.857
  0.857
  0.857
  0.857
  0.857
  0.857
  0.857
  0.857
  0.857
  0.857
Average production assets, $m
  99
  125
  154
  187
  225
  267
  313
  363
  417
  475
  537
  603
  672
  745
  821
  901
  985
  1,072
  1,162
  1,256
  1,354
  1,456
  1,562
  1,672
  1,786
  1,905
  2,028
  2,157
  2,291
  2,430
Working capital, $m
  53
  66
  82
  100
  120
  142
  167
  194
  222
  253
  286
  321
  358
  397
  438
  481
  525
  572
  620
  670
  722
  777
  833
  892
  953
  1,016
  1,082
  1,150
  1,222
  1,296
Total debt, $m
  72
  112
  159
  212
  271
  338
  411
  490
  575
  667
  765
  869
  979
  1,094
  1,215
  1,342
  1,474
  1,611
  1,755
  1,904
  2,059
  2,220
  2,388
  2,562
  2,743
  2,931
  3,126
  3,330
  3,542
  3,762
Total liabilities, $m
  157
  197
  244
  297
  356
  423
  495
  575
  660
  752
  850
  954
  1,064
  1,179
  1,300
  1,427
  1,559
  1,696
  1,840
  1,989
  2,144
  2,305
  2,473
  2,647
  2,828
  3,016
  3,211
  3,415
  3,627
  3,847
Total equity, $m
  229
  287
  355
  432
  519
  616
  722
  837
  962
  1,096
  1,239
  1,390
  1,550
  1,718
  1,894
  2,078
  2,271
  2,472
  2,681
  2,898
  3,124
  3,359
  3,603
  3,856
  4,120
  4,394
  4,679
  4,975
  5,284
  5,605
Total liabilities and equity, $m
  386
  484
  599
  729
  875
  1,039
  1,217
  1,412
  1,622
  1,848
  2,089
  2,344
  2,614
  2,897
  3,194
  3,505
  3,830
  4,168
  4,521
  4,887
  5,268
  5,664
  6,076
  6,503
  6,948
  7,410
  7,890
  8,390
  8,911
  9,452
Debt-to-equity ratio
  0.310
  0.390
  0.450
  0.490
  0.520
  0.550
  0.570
  0.580
  0.600
  0.610
  0.620
  0.630
  0.630
  0.640
  0.640
  0.650
  0.650
  0.650
  0.650
  0.660
  0.660
  0.660
  0.660
  0.660
  0.670
  0.670
  0.670
  0.670
  0.670
  0.670
Adjusted equity ratio
  0.593
  0.593
  0.593
  0.593
  0.593
  0.593
  0.593
  0.593
  0.593
  0.593
  0.593
  0.593
  0.593
  0.593
  0.593
  0.593
  0.593
  0.593
  0.593
  0.593
  0.593
  0.593
  0.593
  0.593
  0.593
  0.593
  0.593
  0.593
  0.593
  0.593

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  27
  36
  46
  57
  70
  84
  100
  117
  135
  155
  186
  208
  232
  256
  282
  309
  337
  366
  397
  428
  461
  496
  531
  568
  606
  646
  688
  731
  776
  823
Depreciation, amort., depletion, $m
  24
  26
  29
  32
  35
  39
  43
  48
  52
  58
  48
  54
  61
  67
  74
  81
  89
  97
  105
  113
  122
  131
  141
  151
  161
  172
  183
  194
  206
  219
Funds from operations, $m
  51
  62
  74
  89
  105
  123
  143
  164
  187
  212
  235
  263
  292
  323
  356
  390
  426
  463
  501
  542
  583
  627
  672
  719
  767
  818
  871
  925
  982
  1,042
Change in working capital, $m
  12
  14
  16
  18
  20
  22
  25
  27
  29
  31
  33
  35
  37
  39
  41
  43
  45
  46
  48
  50
  52
  54
  56
  59
  61
  63
  66
  69
  71
  74
Cash from operations, $m
  39
  48
  59
  71
  85
  101
  118
  138
  159
  181
  202
  228
  255
  285
  315
  348
  381
  416
  453
  491
  531
  572
  615
  660
  706
  755
  805
  857
  911
  967
Maintenance CAPEX, $m
  -7
  -9
  -11
  -14
  -17
  -20
  -24
  -28
  -33
  -38
  -43
  -48
  -54
  -61
  -67
  -74
  -81
  -89
  -97
  -105
  -113
  -122
  -131
  -141
  -151
  -161
  -172
  -183
  -194
  -206
New CAPEX, $m
  -22
  -25
  -29
  -34
  -38
  -42
  -46
  -50
  -54
  -58
  -62
  -66
  -69
  -73
  -76
  -80
  -83
  -87
  -91
  -94
  -98
  -102
  -106
  -110
  -114
  -119
  -124
  -129
  -134
  -139
Cash from investing activities, $m
  -29
  -34
  -40
  -48
  -55
  -62
  -70
  -78
  -87
  -96
  -105
  -114
  -123
  -134
  -143
  -154
  -164
  -176
  -188
  -199
  -211
  -224
  -237
  -251
  -265
  -280
  -296
  -312
  -328
  -345
Free cash flow, $m
  10
  14
  18
  24
  30
  39
  48
  59
  72
  86
  97
  114
  132
  151
  172
  194
  217
  241
  266
  292
  320
  349
  378
  409
  441
  475
  509
  545
  583
  622
Issuance/(repayment) of debt, $m
  34
  40
  47
  53
  60
  66
  73
  79
  86
  92
  98
  104
  110
  115
  121
  127
  132
  138
  143
  149
  155
  161
  167
  174
  181
  188
  196
  204
  212
  221
Issuance/(repurchase) of shares, $m
  23
  23
  22
  20
  17
  12
  6
  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  
  57
  63
  69
  73
  77
  78
  79
  79
  86
  92
  98
  104
  110
  115
  121
  127
  132
  138
  143
  149
  155
  161
  167
  174
  181
  188
  196
  204
  212
  221
Total cash flow (excl. dividends), $m
  68
  77
  87
  97
  107
  117
  127
  139
  157
  178
  195
  218
  242
  267
  293
  320
  349
  378
  409
  442
  475
  510
  546
  583
  622
  663
  705
  749
  795
  842
Retained Cash Flow (-), $m
  -50
  -59
  -68
  -77
  -87
  -96
  -106
  -115
  -125
  -134
  -143
  -151
  -160
  -168
  -176
  -184
  -193
  -201
  -209
  -217
  -226
  -235
  -244
  -254
  -264
  -274
  -285
  -297
  -309
  -321
Prev. year cash balance distribution, $m
  32
  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
  50
  18
  19
  20
  20
  21
  21
  23
  33
  44
  52
  66
  82
  98
  116
  136
  156
  178
  200
  224
  249
  275
  302
  330
  359
  389
  420
  452
  486
  521
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
  48
  17
  17
  16
  16
  15
  14
  14
  19
  23
  25
  28
  31
  33
  34
  34
  34
  33
  31
  28
  26
  23
  20
  17
  14
  11
  9
  7
  5
  4
Current shareholders' claim on cash, %
  93.8
  89.2
  85.8
  83.4
  81.8
  80.8
  80.4
  80.4
  80.4
  80.4
  80.4
  80.4
  80.4
  80.4
  80.4
  80.4
  80.4
  80.4
  80.4
  80.4
  80.4
  80.4
  80.4
  80.4
  80.4
  80.4
  80.4
  80.4
  80.4
  80.4

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 Ltd. (MGIC)

Valuation Ratios
P/E Ratio 31.2
Price to Sales 1.9
Price to Book 1.9
Price to Tangible Book
Price to Cash Flow 13.4
Price to Free Cash Flow 16.3
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 $258 million for the last fiscal year's total revenue generated by Magic Software Enterprises Ltd.. The default revenue input number comes from 0001 income statement of Magic Software Enterprises 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 MGIC stock valuation model: a) initial revenue growth rate of 28% 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 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 Magic Software Enterprises 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 MGIC stock the variable cost ratio is equal to 89.5%.

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 Ltd..

Corporate tax rate of 27% is the nominal tax rate for Magic Software Enterprises 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 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 30%.

Life of production assets of 11.1 years is the average useful life of capital assets used in Magic Software Enterprises 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 MGIC is equal to 16%. 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 - $210.281 million for Magic Software Enterprises 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 48.757 million for Magic Software Enterprises 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 Magic Software Enterprises Ltd. at the current share price and the inputted number of shares is $0.4 billion.

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