Calculating the intrinsic value of Makalot Industrial Co., Ltd. (TWSE:1477)

Key findings

• Using the 2-step free cash flow to equity, the fair value of Makalot Industrial is NT$376
• Makalot Industrial’s share price of NT$439 suggests that the share price is at a similar level to the estimated fair value
• Our fair value estimate is 17% below Makalot Industrial’s analyst price target of NT$455.

How far is Makalot Industrial Co., Ltd. (TWSE:1477) 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 today’s value. One way to do this is by applying the Discounted Cash Flow (DCF) model. There’s actually not too much involved in it, even though it may seem quite complex.

However, keep in mind that there are many ways to estimate the value of a company, and a DCF is just one of them. For those who enjoy stock analysis, the analysis model presented here by Simply Wall St might be of interest.

Check out our latest analysis for Makalot Industrial

Step by step through the calculation

We use the two-stage growth model, which simply means that we consider two stages of the company’s growth. In the early stage, the company might have a higher growth rate, and in the second stage, a stable growth rate is usually assumed. First, we need to get estimates of the next ten years of cash flows. Where possible, we use analyst estimates, but when these are not 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.

A DCF is all about the idea that a dollar in the future is worth less than a dollar today. 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) = NT$39 billion

After calculating the present value of future cash flows in the first 10-year period, we need to calculate the terminal value that takes into account all future cash flows after the first 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 1.0%. We discount the terminal cash flows to today’s value at a cost of equity of 6.9%.

Final value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = NT$5.9 billion × (1 + 1.0%) ÷ (6.9% – 1.0%) = NT$102 billion

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= NT$102 billion ÷ ( 1 + 6.9 %)¹⁰= 52 billion NT$

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 NT$91 billion. In the final step, we divide the equity value by the number of shares outstanding. Compared to the current share price of NT$439, the company seems about fair at the time of writing. The assumptions in each calculation have a big impact on the valuation, so it’s better to consider this a rough estimate that isn’t accurate to the last cent.

Important assumptions

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 view Makalot Industrial 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 6.9%, which is based on a levered beta of 1.078. Beta is a measure of a stock’s volatility relative to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with a set limit between 0.8 and 2.0, which is a reasonable range for a stable company.

SWOT Analysis for Makalot Industrial

Go on:

Valuation is only one side of the coin in developing your investment thesis and should not be the only metric you consider when researching a company. The DCF model is not a perfect tool for stock valuation. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to an undervaluation or overvaluation of the company. If a company grows differently or its cost of equity or risk-free rate changes significantly, the outcome could be very different. For Makalot Industrial, we have compiled three important factors to consider:

1. Risks: You should be aware 1 warning sign for Makalot Industrial we uncovered before considering investing in the company.
2. Future income: How does 1477’s growth rate compare to its 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. Simply Wall St updates its DCF calculation for each Taiwanese 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]