A Look At The Fair Value Of ALMAC Co., Ltd. (KOSDAQ:354320)

Key Insights

• ALMAC's estimated fair value is ₩55,390 based on 2 Stage Free Cash Flow to Equity
• Current share price of ₩46,600 suggests ALMAC is potentially trading close to its fair value
• Peers of ALMAC are currently trading on average at a 62% premium

Today we will run through one way of estimating the intrinsic value of ALMAC Co., Ltd. (KOSDAQ:354320) by taking the forecast future cash flows of the company and discounting them back to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. It may sound complicated, but actually it is quite simple!

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. 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 ALMAC

Crunching The Numbers

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To begin with, we have to get estimates of the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last 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 discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (₩, Millions)	₩25.6b	₩26.6b	₩27.5b	₩28.4b	₩29.2b	₩30.0b	₩30.8b	₩31.7b	₩32.5b	₩33.3b
Growth Rate Estimate Source	Est @ 4.52%	Est @ 3.91%	Est @ 3.48%	Est @ 3.18%	Est @ 2.97%	Est @ 2.82%	Est @ 2.72%	Est @ 2.65%	Est @ 2.60%	Est @ 2.56%
Present Value (₩, Millions) Discounted @ 10.0%	₩23.2k	₩22.0k	₩20.7k	₩19.4k	₩18.2k	₩17.0k	₩15.9k	₩14.8k	₩13.8k	₩12.9k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₩178b

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.5%. We discount the terminal cash flows to today's value at a cost of equity of 10.0%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = ₩33b× (1 + 2.5%) ÷ (10.0%– 2.5%) = ₩456b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ₩456b÷ ( 1 + 10.0%)¹⁰= ₩176b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₩354b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of ₩47k, the company appears about fair value at a 16% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

The Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the 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 ALMAC 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 10.0%, which is based on a levered beta of 1.407. 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.

SWOT Analysis for ALMAC

Looking Ahead:

Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For ALMAC, there are three relevant aspects you should further examine:

1. Risks: For example, we've discovered 2 warning signs for ALMAC that you should be aware of before investing here.
2. Future Earnings: How does A354320'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.
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 is out there you may be missing!

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.