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- KOSE:A272210
Is There An Opportunity With Hanwha Systems Co., Ltd.'s (KRX:272210) 47% Undervaluation?
Key Insights
- The projected fair value for Hanwha Systems is ₩35,502 based on 2 Stage Free Cash Flow to Equity
- Hanwha Systems is estimated to be 47% undervalued based on current share price of ₩18,820
- The ₩23,607 analyst price target for A272210 is 34% less than our estimate of fair value
Today we will run through one way of estimating the intrinsic value of Hanwha Systems Co., Ltd. (KRX:272210) by taking the expected future cash flows and discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.
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.
Check out our latest analysis for Hanwha Systems
What's The Estimated Valuation?
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 need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) forecast
2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | |
Levered FCF (₩, Millions) | ₩94.7b | ₩146.4b | ₩188.1b | ₩226.9b | ₩261.5b | ₩291.4b | ₩317.0b | ₩338.9b | ₩357.9b | ₩374.7b |
Growth Rate Estimate Source | Analyst x10 | Analyst x9 | Est @ 28.43% | Est @ 20.67% | Est @ 15.24% | Est @ 11.43% | Est @ 8.77% | Est @ 6.91% | Est @ 5.60% | Est @ 4.69% |
Present Value (₩, Millions) Discounted @ 6.7% | ₩88.8k | ₩128.7k | ₩155.0k | ₩175.3k | ₩189.4k | ₩197.8k | ₩201.7k | ₩202.2k | ₩200.2k | ₩196.4k |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₩1.7t
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. 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 (2.6%) 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 6.7%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = ₩375b× (1 + 2.6%) ÷ (6.7%– 2.6%) = ₩9.4t
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= ₩9.4t÷ ( 1 + 6.7%)10= ₩4.9t
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₩6.6t. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of ₩19k, the company appears quite undervalued at a 47% 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.
Important 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 Hanwha Systems 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 6.7%, which is based on a levered beta of 0.871. 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 Hanwha Systems
- Debt is not viewed as a risk.
- Earnings declined over the past year.
- Dividend is low compared to the top 25% of dividend payers in the Aerospace & Defense market.
- Annual earnings are forecast to grow for the next 3 years.
- Trading below our estimate of fair value by more than 20%.
- Paying a dividend but company has no free cash flows.
- Annual earnings are forecast to grow slower than the South Korean market.
Looking Ahead:
Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Can we work out why the company is trading at a discount to intrinsic value? For Hanwha Systems, we've compiled three relevant elements you should explore:
- Risks: Be aware that Hanwha Systems is showing 3 warning signs in our investment analysis , you should know about...
- Future Earnings: How does A272210'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.
Valuation is complex, but we're here to simplify it.
Discover if Hanwha Systems 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:A272210
Hanwha Systems
Hanwha Systems Co., Ltd. manufacture and sell various military equipments in South Korea and internationally.
Undervalued with excellent balance sheet.