Is There An Opportunity With Jeisys Medical Inc.'s (KOSDAQ:287410) 46% Undervaluation?

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Jeisys Medical fair value estimate is ₩21,881
• Jeisys Medical is estimated to be 46% undervalued based on current share price of ₩11,770
• Analyst price target for A287410 is ₩14,375 which is 34% below our fair value estimate

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Jeisys Medical Inc. (KOSDAQ:287410) as an investment opportunity by taking the forecast future cash flows of the company and discounting them back to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. 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. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

Check out our latest analysis for Jeisys Medical

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 begin with, we have to get estimates of 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

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (₩, Millions)	₩39.0b	₩26.9b	₩57.3b	₩69.8b	₩80.9b	₩90.5b	₩98.7b	₩105.7b	₩111.7b	₩117.0b
Growth Rate Estimate Source	Analyst x3	Analyst x5	Analyst x3	Est @ 21.68%	Est @ 15.92%	Est @ 11.89%	Est @ 9.07%	Est @ 7.09%	Est @ 5.71%	Est @ 4.74%
Present Value (₩, Millions) Discounted @ 7.5%	₩36.3k	₩23.3k	₩46.1k	₩52.2k	₩56.2k	₩58.5k	₩59.3k	₩59.1k	₩58.1k	₩56.6k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₩506b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 2.5%. We discount the terminal cash flows to today's value at a cost of equity of 7.5%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = ₩117b× (1 + 2.5%) ÷ (7.5%– 2.5%) = ₩2.4t

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ₩2.4t÷ ( 1 + 7.5%)¹⁰= ₩1.1t

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₩1.7t. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of ₩12k, the company appears quite good value at a 46% 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. 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 Jeisys Medical 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 7.5%, which is based on a levered beta of 0.951. 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 Jeisys Medical

Moving On:

Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for a company. It's not possible to obtain a foolproof valuation with a DCF model. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. 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. What is the reason for the share price sitting below the intrinsic value? For Jeisys Medical, we've put together three pertinent aspects you should further examine:

1. Risks: Case in point, we've spotted 1 warning sign for Jeisys Medical you should be aware of.
2. Future Earnings: How does A287410'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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the KOSDAQ every day. If you want to find the calculation for other stocks 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.