Fair value estimate of Sebang Global Battery Co., Ltd. (KRX:004490)

Key findings

• The projected fair value for Sebang Global Battery is ₩118,901 based on the 2-step Free Cash Flow to Equity
• The current share price of ₩96,500 suggests that Sebang Global Battery may be trading close to its fair value
• Sebang Global Battery’s competitors are currently trading at an average premium of 20%.

In this article, we will estimate the intrinsic value of Sebang Global Battery Co., Ltd. (KRX:004490) by taking the expected future cash flows and discounting them to their present value. To do this, we will use the Discounted Cash Flow (DCF) model. It doesn’t actually take too much to do, even though it may seem quite complex.

We would like to point out that there are many ways to value a company and that each method, like DCF, has advantages and disadvantages in certain scenarios. Those who want to learn more about intrinsic value should check out Simply Wall St’s analysis model.

Check out our latest analysis for Sebang Global Battery

Processing the numbers

We use what is called a 2-stage model, which simply means that we have two different growth periods for the company’s cash flows. Generally, the first stage is characterized by higher growth, and the second stage is characterized by lower growth. In the first stage, we need to estimate the company’s cash flows for the next ten years. Since we don’t have analyst estimates of free cash flow available, we extrapolated the previous free cash flow (FCF) from the company’s last reported value. We assume that companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will slow their growth rate over this period. We do this to take into account that growth tends to slow more in the early years than in later years.

A DCF is all about the idea that a dollar in the future is worth less than a dollar today. So we discount the value of these future cash flows to their estimated value in today’s dollars:

Estimation of free cash flow (FCF) over 10 years

(“Est” = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = ₩665b

We now need to calculate the terminal value that takes into account all future cash flows after this ten-year period. The Gordon growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average of the 10-year Treasury yield of 2.5%. We discount the terminal cash flows to today’s value at a cost of equity of 9.0%.

Final value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = ₩133b × (1 + 2.5%) ÷ (9.0% – 2.5%) = ₩2.1t

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= ₩2.1t ÷ ( 1 + 9.0 %)¹⁰= 894 billion ₩

Total value is the sum of the next ten years’ cash flows plus the discounted terminal value, which gives the total value of equity, which in this case is ₩1.6 trillion. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of ₩97,000, the company appears roughly fairly valued at a 19% discount to the current share price. However, keep in mind that this is only an approximate valuation and as with any complex formula, where there’s garbage in, there’s garbage out.

The assumptions

We would like to point out that the key inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you disagree with these results, try the calculation yourself and play with the assumptions. DCF also does not take into account the possible cyclicality of an industry or a company’s future capital needs and therefore does not provide a complete picture of a company’s potential performance. Since we consider Sebang Global Battery as potential shareholders, the cost of equity is used as the discount rate rather than the cost of capital (or weighted average cost of capital, WACC) which takes debt into account. In this calculation, we used 9.0%, which is based on a leveraged beta of 1.219. Beta is a measure of a stock’s volatility relative to the overall market. We get our beta from the industry average beta of globally comparable companies with an imposed limit of between 0.8 and 2.0, which is a reasonable range for a stable company.

SWOT Analysis for Sebang Global Battery

Go on:

Valuation is only one side of the coin in building your investment thesis, and just one of many factors you need to evaluate a company. It’s not possible to get a foolproof valuation using a DCF model. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. If a company is growing at a different rate, or if its cost of equity or risk-free rate changes significantly, the outcome could be very different. For Sebang Global Battery, we’ve compiled three important factors for you to consider:

1. Risks: For example, we found 1 Warning Sign for Sebang Global Battery that you should know.
2. Other high-quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality stocks to get an idea of ​​what else you might be missing out on!
3. More top analyst tips: Want to know what the analysts think? Take a look at our interactive list of analyst recommended stocks and find out which stocks they think could have attractive future prospects!

PS. Simply Wall St updates its DCF calculation for each South Korean stock daily, so if you want to find out the intrinsic value of another stock, just search here.

Do you have feedback on this article? Are you concerned about the content? Get in touch directly from us. Alternatively, send an email to editorial-team (at) simplywallst.com.

This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.

Do you have feedback on this article? Are you interested in the content? Contact us directly. Alternatively, send an email to [email protected]