Fair value calculation of Generalplus Technology Inc. (TWSE:4952)

Key findings

• Using the 2-step free cash flow to equity, the estimated fair value of Generalplus Technology is NT$54.65.
• The current share price of NT$59.40 suggests that Generalplus Technology may be trading close to its fair value
• The industry average of 59% suggests that Generalplus Technology’s competitors are currently trading at a higher premium to fair value

In this article, we will estimate the intrinsic value of Generalplus Technology Inc. (TWSE:4952) by taking the company’s projected future cash flows and discounting them to today’s value using the Discounted Cash Flow (DCF) model. Models like this may seem incomprehensible to a layperson, but they are relatively easy to follow.

We generally believe that the value of a company is the present value of all the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without its flaws. If you still have some burning questions about this type of valuation, take a look at Simply Wall St’s analysis model.

Check out our latest analysis for Generalplus Technology

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, the first stage is higher growth and the second stage is a period of lower growth. First, we need to get estimates for the next ten years of cash flows. Since we don’t have analyst estimates for free cash flow, 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.

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:

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$3.0 billion

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 (1.0%) 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 8.2%.

Final value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = NT$457 million × (1 + 1.0%) ÷ (8.2% – 1.0%) = NT$6.4 billion

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= NT$6.4 billion ÷ (1 + 8.2%)¹⁰= NT$2.9 billion

The total value or equity value is then the sum of the present value of future cash flows, which in this case is NT$5.9 billion. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of NT$59.4, the company appears to be about its fair value at the time of writing. 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

The above calculation heavily depends on two assumptions. The first is the discount rate and the other is the 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 Generalplus Technology 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 8.2% which is based on a leveraged beta of 1.319. 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 0.8 to 2.0 which is a reasonable range for a stable company.

Go on:

While the DCF calculation is important, it is only one of many factors you need to evaluate a company. The DCF model is not a perfect stock valuation tool. Instead, a DCF model is best used to test certain assumptions and theories to see if they would lead to an undervaluation or overvaluation of the company. For example, making a small adjustment to the terminal value growth rate can dramatically change the overall result. For Generalplus Technology, we have compiled three relevant elements for you to consider:

1. Risks: A typical example: We discovered 3 warning signs for Generalplus Technology You should be aware.
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. Other environmentally friendly companies: Are you concerned about the environment and believe that consumers will increasingly buy environmentally friendly products? Browse through our interactive list of companies thinking about a greener future and discover some stocks you may not have thought of yet!

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.

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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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