Estimation of the intrinsic value of COWINTECH Co. Ltd. (KOSDAQ:282880)

Key findings

• The projected fair value for COWINTECH is ₩19,450 based on the 2-step Free Cash Flow to Equity
• The current share price of ₩18,770 suggests that COWINTECH may be trading close to its fair value
• The analyst price target for A282880 is ₩28,800, which is 48% above our fair value estimate.

Does the COWINTECH Co. Ltd. (KOSDAQ:282880) share price in June reflect its real value? Today we will estimate the intrinsic value of the stock by taking the expected future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model on this occasion. There is actually not too much to it, even though it may seem quite complex.

Companies can be valued in many ways, so we want to point out that a DCF is not perfect for every situation. If you want to learn more about discounted cash flow, you can read the basics of this calculation in detail in Simply Wall St’s analysis model.

Check out our latest analysis for COWINTECH

The calculation

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 speaking, the first stage is one of higher growth, and the second stage is one of lower growth. First, we need to estimate the next ten years of cash flows. Where possible, we use analyst estimates, but when these aren’t available, we extrapolate the previous free cash flow (FCF) from the last estimate or 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.

In general, we assume that a dollar today is worth more than a dollar in the future. Therefore, we need to discount the sum of these future cash flows to arrive at an estimate of present value:

10-year free cash flow (FCF) forecast

(“Est” = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = ₩137b

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 8.6%.

Final value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = ₩10b × (1 + 2.5%) ÷ (8.6% – 2.5%) = ₩174b

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= ₩174b÷ ( 1 + 8.6 %)¹⁰= ₩77b

The total value is the sum of the next ten years’ cash flows plus the discounted terminal value, which gives the total equity value, which in this case is ₩214b. The final step is to divide the equity value by the number of shares outstanding. Relative to the current share price of ₩19k, the company appears roughly fairly valued at a 3.5% 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.

Important 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. Part of investing is making your own assessment of a company’s future performance, so try the calculation yourself and check your own 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 COWINTECH 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 8.6%, which is based on a leveraged beta of 1.146. 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 COWINTECH

Next Steps:

Valuation is only one side of the coin when building your investment thesis and should not be the only metric you consider when researching a company. DCF models are not the be-all and end-all of investment valuation. Rather, they should be viewed as a guide to “what assumptions need to hold for this stock to be under/overvalued.” If a company grows differently or its cost of equity or risk-free rate changes significantly, the outcome can look very different. For COWINTECH, we have compiled three additional factors to consider:

1. Risks: For example, we found 2 warning signals for COWINTECH that you should know before investing here.
2. Future income: How does A282880’s growth rate compare to competitors 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 solid companies: Low debt, high returns on equity, and good past performance are the foundation of a strong company. Check out our interactive list of stocks with solid business fundamentals to see if there are any other companies you may not have considered!

PS. The Simply Wall St app performs a discounted cash flow valuation for every stock in the KOSDAQ 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 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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