Fair value calculation of Evergreen Aviation Technologies Corporation (TWSE:2645)

Key findings

• The projected fair value for Evergreen Aviation Technologies is NT$110 based on the dividend discount model
• The current share price of NT$103 suggests that Evergreen Aviation Technologies may be trading close to its fair value
• Evergreen Aviation Technologies’ competitors are currently trading at an average premium of 145%.

In this article, we will estimate the intrinsic value of Evergreen Aviation Technologies Corporation (TWSE:2645) by estimating the company’s future cash flows and discounting them to their present value. This is done using the Discounted Cash Flow (DCF) model. Don’t be put off by the technical jargon, the math behind it is actually quite simple.

However, keep in mind that there are many ways to estimate the value of a company, and a DCF is just one of them. If you want to learn more about intrinsic value, you should check out Simply Wall St’s analysis model.

Check out our latest analysis for Evergreen Aviation Technologies

Step by step through the calculation

Because Evergreen Aviation Technologies is in the aerospace and defense sector, we need to calculate intrinsic value a little differently. This approach uses dividends per share (DPS) because free cash flow is difficult to estimate and often unreported by analysts. Unless a company pays out the majority of its free cash flow as dividends, this method will typically underestimate the stock’s value. It uses the “Gordon Growth Model,” which simply assumes that dividend payments will continue to grow forever at a sustainable growth rate. For a number of reasons, it uses a very conservative growth rate that cannot exceed that of a company’s gross domestic product (GDP). In this case, we used the 5-year average of the 10-year Treasury bond yield (1.0%). The expected dividend per share is then discounted to today’s value using a cost of equity of 5.5%. Relative to the current share price of NT$103, the company appears to be roughly fairly valued at a 6.4% discount to the current share price. However, valuations are imprecise instruments, much like a telescope: move a few degrees and you end up in another galaxy. Keep that in mind.

Value per share = Expected dividend per share / (Discount rate – Perpetual growth rate)

= NT$4.9 / (5.5% – 1.0%)

= 110 NT$

The assumptions

The above calculation relies heavily on two assumptions. The first is the discount rate and the other is the cash flows. You don’t have to agree with these inputs, I recommend repeating the calculations yourself and playing with them. The DCF also doesn’t take into account the possible cyclicality of an industry or a company’s future capital needs and therefore doesn’t provide a complete picture of a company’s potential performance. Since we consider Evergreen Aviation Technologies 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 5.5% which is based on a leveraged beta of 0.819. 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 Evergreen Aviation Technologies

Looking ahead:

While a company’s valuation is important, it is only one of many factors you need to evaluate a company. It is not possible to get a foolproof valuation using a DCF model. The best thing to do is to apply different cases and assumptions and see how they affect the company’s valuation. For example, if the terminal value growth rate is adjusted slightly, it can change the overall result dramatically. For Evergreen Aviation Technologies, we have compiled three essential factors for you to consider:

1. Risks: For example, we found 1 warning signal for Evergreen Aviation Technologies that you need to consider before investing here.
2. Future income: How does 2645’s growth rate compare to peers and the overall market? Learn more about analyst consensus numbers for the coming years by using our free chart of analyst growth expectations.
3. 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!

PS. The Simply Wall St app runs a discounted cash flow valuation for every stock on the TWSE every day. If you want to find the calculation for other stocks, just search here.

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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.

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