Stock Analysis
- South Korea
- /
- Auto Components
- /
- KOSE:A012330
Is There An Opportunity With Hyundai Mobis Co.,Ltd's (KRX:012330) 43% Undervaluation?
Key Insights
- The projected fair value for Hyundai MobisLtd is ₩386,981 based on 2 Stage Free Cash Flow to Equity
- Current share price of ₩220,000 suggests Hyundai MobisLtd is potentially 43% undervalued
- The ₩287,700 analyst price target for A012330 is 26% less than our estimate of fair value
In this article we are going to estimate the intrinsic value of Hyundai Mobis Co.,Ltd (KRX:012330) by estimating the company's future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Don't get put off by the jargon, the math behind it is actually quite straightforward.
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. 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 Hyundai MobisLtd
The Calculation
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 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 discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) forecast
2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | |
Levered FCF (₩, Millions) | ₩2.14t | ₩2.38t | ₩2.28t | ₩2.23t | ₩2.21t | ₩2.21t | ₩2.23t | ₩2.26t | ₩2.30t | ₩2.35t |
Growth Rate Estimate Source | Analyst x12 | Analyst x9 | Est @ -4.32% | Est @ -2.25% | Est @ -0.81% | Est @ 0.20% | Est @ 0.91% | Est @ 1.40% | Est @ 1.75% | Est @ 1.99% |
Present Value (₩, Millions) Discounted @ 8.2% | ₩1.97m | ₩2.03m | ₩1.80m | ₩1.63m | ₩1.49m | ₩1.38m | ₩1.29m | ₩1.21m | ₩1.14m | ₩1.07m |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₩15t
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 2.6%. We discount the terminal cash flows to today's value at a cost of equity of 8.2%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = ₩2.3t× (1 + 2.6%) ÷ (8.2%– 2.6%) = ₩43t
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= ₩43t÷ ( 1 + 8.2%)10= ₩20t
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₩35t. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of ₩220k, the company appears quite undervalued at a 43% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.
Important Assumptions
We would point out that the most important 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 redoing the calculations yourself and playing with them. 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 Hyundai MobisLtd 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 8.2%, which is based on a levered beta of 1.189. 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 Hyundai MobisLtd
- Earnings growth over the past year exceeded the industry.
- Debt is not viewed as a risk.
- Dividends are covered by earnings and cash flows.
- Dividend is low compared to the top 25% of dividend payers in the Auto Components market.
- Annual earnings are forecast to grow for the next 3 years.
- Good value based on P/E ratio and estimated fair value.
- Annual earnings are forecast to grow slower than the South Korean market.
Next Steps:
Although the valuation of a company is important, it is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. 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 sitting below the intrinsic value? For Hyundai MobisLtd, we've compiled three pertinent factors you should look at:
- Risks: For example, we've discovered 1 warning sign for Hyundai MobisLtd that you should be aware of before investing here.
- Future Earnings: How does A012330'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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the KOSE every day. If you want to find the calculation for other stocks just search here.
Valuation is complex, but we're here to simplify it.
Discover if Hyundai MobisLtd might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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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.
About KOSE:A012330
Hyundai MobisLtd
Engages in the auto parts business in Korea, China, the United States, Europe, and internationally.