A Look At The Intrinsic Value Of Sapiens International Corporation NV (NASDAQ:SPNS)

Simply Wall St.

Wed, Dec 5, 2018, 5:56 AM

How far off is Sapiens International Corporation NV (NASDAQ:SPNS) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to their present value. This is done using the Discounted Cash Flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model. If you are reading this and its not December 2018 then I highly recommend you check out the latest calculation for Sapiens International by following the link below.

See our latest analysis for Sapiens International

The calculation

I use what is known as a 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the first stage is higher growth, and the second stage is a more stable growth phase. To start off with we need to estimate the next five years of cash flows. The sum of these cash flows is then discounted to today’s value.

5-year cash flow estimate

	2019	2020	2021	2022	2023
Levered FCF ($, Millions)	$42.69	$49.80	$58.11	$67.79	$78.64
Source	Est @ 16.67%	Est @ 16.67%	Est @ 16.67%	Est @ 16.67%	Est @ 16%, capped from 16.67%
Present Value Discounted @ 11.89%	$38.15	$39.78	$41.48	$43.25	$44.84

Present Value of 5-year Cash Flow (PVCF)= US$208m

The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of the GDP. In this case I have used the 10-year government bond rate (2.9%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 11.9%.

Terminal Value (TV) = FCF₂₀₂₂ × (1 + g) ÷ (r – g) = US$79m × (1 + 2.9%) ÷ (11.9% – 2.9%) = US$906m

Present Value of Terminal Value (PVTV) = TV / (1 + r)⁵ = US$906m ÷ ( 1 + 11.9%)⁵ = US$517m

The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is US$724m. To get the intrinsic value per share, we divide this by the total number of shares outstanding, or the equivalent number if this is a depositary receipt or ADR. This results in an intrinsic value of $14.51. Relative to the current share price of $11.86, the stock is about right, perhaps slightly undervalued at a 18% discount to what it is available for right now.

NasdaqCM:SPNS Intrinsic Value Export December 5th 18

The assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don’t agree with my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at Sapiens International as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 11.9%, which is based on a levered beta of 1.268. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Next Steps:

Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn’t be the only metric you look at when researching a company. For SPNS, I’ve put together three important factors you should further examine:

Financial Health: Does SPNS have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
Future Earnings: How does SPNS’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of SPNS? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St does a DCF calculation for every US stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

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