Does This Valuation Of COWAY Co., Ltd. (KRX:021240) Imply Investors Are Overpaying?

April 15, 2021
  •  Updated
December 01, 2022
KOSE:A021240
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How far off is COWAY Co., Ltd. (KRX:021240) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by projecting its future cash flows and then discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

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 COWAY

Is COWAY fairly valued?

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. In the first stage we need to estimate the cash flows to the business over the next ten years. 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.

Generally we assume that a dollar today is more valuable than a dollar in the future, 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

2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Levered FCF (₩, Millions) ₩336.8b ₩416.5b ₩368.0b ₩342.7b ₩330.0b ₩325.1b ₩325.3b ₩329.1b ₩335.3b ₩343.5b
Growth Rate Estimate Source Analyst x5 Analyst x7 Analyst x1 Est @ -6.87% Est @ -3.7% Est @ -1.49% Est @ 0.06% Est @ 1.15% Est @ 1.91% Est @ 2.44%
Present Value (₩, Millions) Discounted @ 11% ₩302.7k ₩336.4k ₩267.1k ₩223.5k ₩193.5k ₩171.3k ₩154.0k ₩140.0k ₩128.2k ₩118.0k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₩2.0t

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 3.7%. We discount the terminal cash flows to today's value at a cost of equity of 11%.

Terminal Value (TV)= FCF2030 × (1 + g) ÷ (r – g) = ₩344b× (1 + 3.7%) ÷ (11%– 3.7%) = ₩4.7t

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= ₩4.7t÷ ( 1 + 11%)10= ₩1.6t

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₩3.6t. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of ₩67k, the company appears potentially overvalued at the time of writing. 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.

dcf
KOSE:A021240 Discounted Cash Flow April 15th 2021

Important assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 COWAY 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 11%, which is based on a levered beta of 1.274. 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:

Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. It's not possible to obtain a foolproof valuation with a DCF model. 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 instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Why is the intrinsic value lower than the current share price? For COWAY, we've compiled three relevant factors you should look at:

  1. Risks: Case in point, we've spotted 1 warning sign for COWAY you should be aware of.
  2. Future Earnings: How does A021240'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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