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Is Woory Industrial Co., Ltd. (KOSDAQ:215360) Expensive For A Reason? A Look At Its Intrinsic Value
Today we will run through one way of estimating the intrinsic value of Woory Industrial Co., Ltd. (KOSDAQ:215360) by taking the forecast future cash flows of the company and discounting them back to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.
View our latest analysis for Woory Industrial
The calculation
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, 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 the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) estimate
2021 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | |
Levered FCF (₩, Millions) | ₩29.0b | ₩24.0b | ₩21.3b | ₩19.9b | ₩19.2b | ₩19.0b | ₩19.0b | ₩19.2b | ₩19.6b | ₩20.1b |
Growth Rate Estimate Source | Analyst x1 | Analyst x1 | Est @ -11.05% | Est @ -6.63% | Est @ -3.54% | Est @ -1.37% | Est @ 0.14% | Est @ 1.2% | Est @ 1.95% | Est @ 2.47% |
Present Value (₩, Millions) Discounted @ 14% | ₩25.4k | ₩18.5k | ₩14.4k | ₩11.8k | ₩10.0k | ₩8.6k | ₩7.6k | ₩6.7k | ₩6.0k | ₩5.4k |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₩114b
We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (3.7%) 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 14%.
Terminal Value (TV)= FCF2030 × (1 + g) ÷ (r – g) = ₩20b× (1 + 3.7%) ÷ (14%– 3.7%) = ₩201b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= ₩201b÷ ( 1 + 14%)10= ₩54b
The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is ₩168b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of ₩25k, the company appears reasonably expensive at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.
The assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Woory 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 accounts for debt. In this calculation we've used 14%, which is based on a levered beta of 1.740. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
Next Steps:
Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. What is the reason for the share price exceeding the intrinsic value? For Woory Industrial, we've compiled three essential factors you should further examine:
- Risks: Be aware that Woory Industrial is showing 2 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...
- Future Earnings: How does A215360's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
- Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
PS. Simply Wall St updates its DCF calculation for every South Korean stock every day, so if you want to find the intrinsic value of any other stock just search here.
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Valuation is complex, but we're here to simplify it.
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About KOSDAQ:A215360
Woory Industrial
Manufactures and sells automotive parts and components for IC and electric engines in South Korea and internationally.
Adequate balance sheet and fair value.