Global Unichip Corp. (TWSE:3443) shares could be 32% above their estimated intrinsic value

Key findings

• Global Unichip’s estimated fair value is NT$1,195 based on 2-step free cash flow to equity
• The current share price of NT$1,580 suggests that Global Unichip may be overvalued by 32%
• The analyst price target for 3443 is NT$1,599, which is 34% above our fair value estimate.

Does the July share price of Global Unichip Corp. (TWSE:3443) reflect its actual value? Today we will estimate the intrinsic value of the stock by estimating the company’s future cash flows and discounting them to their present value. Our analysis will use the Discounted Cash Flow (DCF) model. Before you think you can’t understand it, just keep reading! It’s actually much less complex than you think.

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. Anyone interested in learning more about intrinsic value should check out Simply Wall St’s analysis model.

Check out our latest analysis for Global Unichip

Step by step through the calculation

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 estimate the next ten years of cash flows. Where possible, we use analyst estimates, but when these aren’t available, we extrapolate 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 based on the idea that a dollar in the future is worth less than a dollar today. 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) = 71 billion NT$

The second phase is also called the terminal value, which is the company’s cash flow after the first phase. 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 8.2%.

Final value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = NT$14 billion × (1 + 1.0%) ÷ (8.2% – 1.0%) = NT$197 billion

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= NT$197 billion ÷ ( 1 + 8.2 %)¹⁰= NT$90 billion

Total value is the sum of the next ten years’ cash flows plus the discounted terminal value, which gives the total value of equity, which in this case is NT$160 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$1.6k, the company may appear overvalued at the time of writing. 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

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 potential 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 Global Unichip 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 levered beta of 1.319. 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 Global Unichip

Looking ahead:

Valuation is only one side of the coin in building your investment thesis and just one of many factors you need to evaluate for a company. The DCF model is not a perfect tool for stock valuation. 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, changes in the company’s cost of equity or risk-free rate can significantly affect valuation. Can we find out why the company is trading at a premium to intrinsic value? For Global Unichip, we’ve compiled three key elements for you to consider:

1. Risks: For example, we found 1 warning signal for Global Unichip that you need to consider before investing here.
2. Future income: How does 3443’s growth rate compare to its 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 runs a discounted cash flow valuation for every stock on the TWSE 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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