The intrinsic value of HYBE Co., Ltd. (KRX:352820) may be 26% higher than the share price

Key findings

• The estimated fair value of HYBE is ₩238,386 based on 2-step Free Cash Flow to Equity
• HYBE is estimated to be undervalued by 20% based on the current share price of ₩189,700
• The analyst price target of ₩281,625 for A352820 is 18% above our fair value estimate

How far is HYBE Co., Ltd. (KRX:352820) from its intrinsic value? Using the most recent financial data, we will check if the stock is fairly valued by taking the expected future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will use for this. Before you think you can’t understand it, just keep reading! It’s actually a lot less complex than you think.

Companies can be valued in many ways, so we would like to point out that a DCF is not perfect for every situation. If you still have pressing questions about this type of valuation, take a look at Simply Wall St’s analysis model.

Check out our latest analysis for HYBE

The model

We use a two-stage DCF model which, as the name suggests, considers two phases of growth. The first stage is generally a higher growth phase that stabilizes toward the terminal value captured in the second “steady growth” stage. First, we need to obtain estimates of 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, the sum of these future cash flows is discounted to today’s value:

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) = 4.1t

The second period is also called the terminal value. This is the company’s cash flow after the first period. For various reasons, a very conservative growth rate is used, which cannot exceed a country’s GDP growth. In this case, we used the 5-year average of the 10-year Treasury yield (2.5%) to estimate future growth. In the same way as with the 10-year “growth” period, we discount future cash flows to today’s value, using a cost of equity of 8.5%.

Final value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = ₩784b × (1 + 2.5%) ÷ (8.5% – 2.5%) = ₩13t

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= ₩13t÷ ( 1 + 8.5 %)¹⁰= ₩5.9t

The total value or equity value is then the sum of the present value of future cash flows, which in this case is ₩9.9 trillion. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of ₩190,000, the company appears somewhat undervalued at a 20% 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 this in mind.

The assumptions

The above calculation relies heavily on two assumptions. The first is the discount rate and the other is the 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 are considering HYBE 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 8.5% which is based on a leveraged beta of 1.137. 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 HYBE

Go on:

Valuation is only one side of the coin when developing 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. The best thing to do is to apply different cases and assumptions and see how they affect the company’s valuation. For example, changes in the company’s cost of equity or risk-free interest rate can significantly affect the valuation. Can we find out why the company is trading at a discount to intrinsic value? For HYBE, we’ve put together three fundamental aspects for you to consider:

1. Risks: We think you should 1 warning sign for HYBE We indicated this before investing in the company.
2. Future income: How does A352820’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 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. 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.

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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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