Estimating The Intrinsic Value Of i-SENS, Inc. (KOSDAQ:099190)

Key Insights

• The projected fair value for i-SENS is ₩18,038 based on 2 Stage Free Cash Flow to Equity
• i-SENS' ₩17,700 share price indicates it is trading at similar levels as its fair value estimate
• i-SENS' peers are currently trading at a premium of 686% on average

Today we will run through one way of estimating the intrinsic value of i-SENS, Inc. (KOSDAQ:099190) by estimating the company's future cash flows and discounting them to their present 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 still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

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What's The Estimated Valuation?

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. 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) estimate

	2026	2027	2028	2029	2030	2031	2032	2033	2034	2035
Levered FCF (₩, Millions)	₩4.00b	₩9.00b	₩13.5b	₩18.4b	₩23.3b	₩27.7b	₩31.7b	₩35.1b	₩38.1b	₩40.7b
Growth Rate Estimate Source	Analyst x1	Analyst x1	Est @ 50.43%	Est @ 36.17%	Est @ 26.18%	Est @ 19.19%	Est @ 14.30%	Est @ 10.87%	Est @ 8.47%	Est @ 6.80%
Present Value (₩, Millions) Discounted @ 8.2%	₩3.7k	₩7.7k	₩10.7k	₩13.4k	₩15.7k	₩17.3k	₩18.2k	₩18.7k	₩18.7k	₩18.5k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₩142b

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 (2.9%) 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 8.2%.

Terminal Value (TV)= FCF₂₀₃₅ × (1 + g) ÷ (r – g) = ₩41b× (1 + 2.9%) ÷ (8.2%– 2.9%) = ₩783b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ₩783b÷ ( 1 + 8.2%)¹⁰= ₩355b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₩498b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of ₩18k, the company appears about fair value at a 1.9% 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

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 i-SENS 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 1.083. 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.

View our latest analysis for i-SENS

SWOT Analysis for i-SENS

Next Steps:

Whilst important, the DCF calculation is only one of many factors that you need to assess for 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. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For i-SENS, there are three additional aspects you should assess:

1. Risks: For example, we've discovered 1 warning sign for i-SENS that you should be aware of before investing here.
2. Future Earnings: How does A099190'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 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.

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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.