Estimating The Intrinsic Value Of Y2 Solution Co., Ltd (KRX:011690)

Key Insights

• Y2 Solution's estimated fair value is ₩3,512 based on 2 Stage Free Cash Flow to Equity
• With ₩3,670 share price, Y2 Solution appears to be trading close to its estimated fair value
• When compared to theindustry average discount of -1,459%, Y2 Solution's competitors seem to be trading at a greater premium to fair value

How far off is Y2 Solution Co., Ltd (KRX:011690) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced 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.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

View our latest analysis for Y2 Solution

Is Y2 Solution Fairly Valued?

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. In the first stage we need to estimate the cash flows to the business over the next ten years. 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.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) estimate

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (₩, Millions)	₩2.24b	₩3.27b	₩4.34b	₩5.37b	₩6.30b	₩7.11b	₩7.81b	₩8.40b	₩8.92b	₩9.37b
Growth Rate Estimate Source	Est @ 64.13%	Est @ 45.66%	Est @ 32.73%	Est @ 23.68%	Est @ 17.34%	Est @ 12.91%	Est @ 9.80%	Est @ 7.63%	Est @ 6.11%	Est @ 5.04%
Present Value (₩, Millions) Discounted @ 7.7%	₩2.1k	₩2.8k	₩3.5k	₩4.0k	₩4.3k	₩4.6k	₩4.6k	₩4.6k	₩4.6k	₩4.5k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₩40b

The second stage is also known as Terminal Value, this is the business's cash flow after 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 7.7%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = ₩9.4b× (1 + 2.6%) ÷ (7.7%– 2.6%) = ₩187b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ₩187b÷ ( 1 + 7.7%)¹⁰= ₩89b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₩128b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of ₩3.7k, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

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. 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 Y2 Solution 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 7.7%, which is based on a levered beta of 1.090. 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.

Moving On:

Although the valuation of a company is important, it 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. 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. For Y2 Solution, we've compiled three fundamental aspects you should further examine:

1. Risks: Every company has them, and we've spotted 2 warning signs for Y2 Solution you should know about.
2. 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!
3. Other Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!

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.