A look at the intrinsic value of Elensys Co.,Ltd. (KOSDAQ:264850)

Key findings

• Using the 2-step free cash flow to equity, the fair value of ElensysLtd is ₩6,494
• ElensysLtd’s share price of ₩5,270 suggests that the stock price is trading at a similar level to the estimated fair value.
• The average premium for ElensysLtd’s competitors is currently 1,507%

Today we will go through one way to estimate the intrinsic value of Elensys Co.,Ltd. (KOSDAQ:264850) 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. Models like this may seem incomprehensible to a layperson, but they are relatively easy to follow.

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 ElensysLtd

Processing the numbers

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 may 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. Since we don’t have analyst estimates of free cash flow available, 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 down 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. So we discount the value of these future cash flows to their estimated value in today’s dollars:

10-year free cash flow (FCF) forecast

(“Est” = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = ₩74b

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 2.5%. We discount the terminal cash flows to today’s value at a cost of equity of 8.3%.

Final value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = ₩15b × (1 + 2.5%) ÷ (8.3% – 2.5%) = ₩272b

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= ₩272b÷ ( 1 + 8.3 %)¹⁰= ₩123b

The total value or equity value is then the sum of the present value of future cash flows, which in this case is ₩197 billion. In the final step, we divide the equity value by the number of shares outstanding. Relative to the current share price of ₩5.3 thousand, the company appears roughly fairly valued at a 19% 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.

Important assumptions

We would like to point out that the main inputs to a discounted cash flow are the discount rate and of course the actual cash flows. You don’t have to agree with these inputs, I recommend repeating the calculations yourself and playing around with them. 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 ElensysLtd as potential shareholders, the cost of equity is used as the discount rate and not the cost of capital (or weighted average cost of capital, WACC) which takes debt into account. In this calculation, we used 8.3% which is based on a leveraged beta of 1.095. Beta is a measure of a stock’s volatility compared 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 ElensysLtd

Looking ahead:

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.” For example, making a small adjustment to the terminal value growth rate can dramatically change the overall outcome. For ElensysLtd, we have compiled three relevant elements for you to evaluate:

1. Financial health: Does A264850 have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks for key factors such as debt and risk.
2. 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!
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. 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 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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