Overview of the intrinsic value of Veridis Environmental Ltd (TLV:VRDS)

·

·

key insights

  • The expected fair value of Veridis Environment based on the free cash flow to the two-tiered stock is ₪24.59.
  • The current share price of ₪21.99 suggests that Veridis Environmental may be trading close to its fair value
  • The industry average discount to fair value is 9.7%, suggesting that Veridis Environmental’s peers are currently trading at lower discounts.

How far is Veridis Environmental Ltd (TLV:VRDS) from its intrinsic value? Using the latest financial data, we can discount expected future cash flows to its current value to determine whether the stock is fairly priced. confirm. Here we use a discounted cash flow (DCF) model. Although such a model may seem beyond the comprehension of a layman, it is very easy to follow.

It’s worth pointing out that DCF isn’t perfect for every situation, as companies are valued in many different ways. If you still have doubts about this type of valuation, take a look at the Simply Wall St analysis model.

See the latest analysis of the Veridis environment.

What is the estimated valuation?

As the name suggests, we use a two-stage DCF model that considers two stages of growth. The first stage is typically a period of higher growth, leveling off towards terminal value, which is captured by a second period of ‘steady growth’. The first step is to estimate the cash flow to the business over the next 10 years. As analyst estimates for free cash flow are not available, we have extrapolated the previous free cash flow (FCF) from the company’s last reported value. We assume that companies with shrinking free cash flow will see their rate of shrinkage slow, and companies with growing free cash flow will see their growth rate slow over this period. This reflects the fact that growth tends to be slower in the early years than in later years.

We generally assume that a dollar today is worth more than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today’s dollars.

Estimated 10-year free cash flow (FCF)

2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
Leverage FCF (₪, million) ₪249.8m ₪262.2m ₪272.8m ₪282.1m ₪290.4m ₪298.1m ₪305.2m ₪312.1m ₪318.8m ₪325.4m
Growth rate estimation source Estimated @ 6.29% Estimated @ 4.97% Estimated @ 4.05% Estimated @ 3.40% Estimated @ 2.95% Estimated @ 2.63% Estimated @ 2.41% Estimated @ 2.25% Estimated @ 2.14% Estimated @ 2.07%
Present value (₪, million) Discount @ 9.5% ₪228 ₪219 ₪208 ₪196 ₪185 ₪173 ₪162 ₪151 ₪141 ₪132

(“Est” = FCF growth rate estimated by Simply Wall St)
Present value of cash flows over 10 years (PVCF) =₪1.8b

The second stage is also called the terminal value, which is the cash flow of the business after the first stage. The Gordon Growth formula is used to calculate the terminal value with a future annual growth rate equal to his five-year average of the 10-year Treasury yield of 1.9%. The final cash flows are discounted to today’s value at a cost of equity of 9.5%.

Terminal value (TV)=FCF2033 × (1 + g) ÷ (r – g) = ₪325m× (1 + 1.9%) ÷ (9.5% – 1.9%) = ₪4.4b

Present Value of Terminal Value (PVTV)= TV / (1 + r)Ten= ₪4.4b÷ ( 1 + 9.5%)Ten=₪1.8b

The total value is the sum of the cash flows over the next 10 years plus the discounted terminal value, resulting in the total capital value. In this case, it becomes ₪3.6b. To get the intrinsic value per share, divide this by the total number of shares outstanding. Compared to the current share price of ₪22.0, the company looks at near fair value, which is an 11% discount to the current share price. It is best to view this as a rough estimate, not accurate to the last cent, as the assumptions in the calculations have a significant impact on the valuation.

TASE:VRDS Discounted Cash Flow January 5, 2024

Important prerequisites

It is important to point out that the most important input to discounted cash flows is the discount rate, which is, of course, the actual cash flows. Part of investing is making your own assessment of a company’s future performance. So check your assumptions by doing your own calculations. Additionally, DCF does not give a complete picture of a company’s potential performance because it does not take into account the cyclicality of the industry or the company’s future capital requirements. Given that we are considering Veridis Environmental as a potential shareholder, the cost of capital is used as the discount rate, rather than the cost of capital factoring in debt (or weighted average cost of capital, WACC). For this calculation, we used 9.5% based on a leverage beta of 1.247. Beta is a measure of a stock’s volatility compared to the market as a whole. Beta values ​​are derived from industry average beta values ​​for globally comparable companies and are constrained to a range of 0.8 to 2.0, which is a reasonable range for stable businesses.

SWOT analysis of the Veridis environment

strength

  • Dividends are covered by profits and cash flow.
Weakness

  • Interest payments on debt are not adequately covered.
  • The dividend is low compared to the top 25% of dividend payers in the commercial services market.
  • Shareholders have been diluted over the past year.
opportunity

  • Based on current free cash flow, it has ample cash runway for over 3 years.
  • The current stock price is below our estimate of fair value.
  • The lack of analyst coverage makes it difficult to determine VRDS’s earnings outlook.
threat

  • Debt is not fully covered by operating cash flow.

to the next:

Valuation of a company is important, but it is only one of many factors that should be used to evaluate a company. The DCF model is not the ultimate in investment valuation. If possible, it’s a good idea to apply different cases and assumptions and see how they affect the company’s valuation. For example, changes in a company’s cost of equity or risk-free rate can have a significant impact on valuations. We have summarized three factors to further evaluate your Veridis environment.

  1. risk: Notice that the Veridis environment is shown. 3 warning signs in investment analysis two of which are a bit unpleasant…
  2. Other high quality alternatives: Do you like good all-rounders? Explore our interactive list of quality stocks to figure out what else you’re missing.
  3. Other top analyst picks: Want to know what analysts are thinking? Check out our interactive list of analyst-picked top stocks to find stocks whose future outlook looks attractive.

PS. Simply Wall St updates DCF calculations for all Israeli stocks daily, so if you want to know the intrinsic value of other stocks, search here.

Valuation is complex, but we help make it simple.

Check out our comprehensive analysis, including below, to see if Veridis Environment is potentially overvalued or undervalued. Fair value estimates, risks and caveats, dividends, insider trading, and financial health.

See free analysis

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodologies, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.

Source link



Leave a Reply

Your email address will not be published. Required fields are marked *