Stock Analysis
- South Korea
- /
- Interactive Media and Services
- /
- KOSE:A020120
A Look At The Intrinsic Value Of KidariStudio, Inc. (KRX:020120)
Key Insights
- Using the 2 Stage Free Cash Flow to Equity, KidariStudio fair value estimate is ₩4,060
- KidariStudio's ₩3,430 share price indicates it is trading at similar levels as its fair value estimate
- Industry average discount to fair value of 31% suggests KidariStudio's peers are currently trading at a higher discount
How far off is KidariStudio, Inc. (KRX:020120) 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. It may sound complicated, but actually it is quite simple!
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
View our latest analysis for KidariStudio
The Model
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) estimate
2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | |
Levered FCF (₩, Millions) | ₩12.0b | ₩11.0b | ₩10.5b | ₩10.2b | ₩10.1b | ₩10.1b | ₩10.2b | ₩10.3b | ₩10.5b | ₩10.7b |
Growth Rate Estimate Source | Analyst x1 | Analyst x1 | Est @ -4.84% | Est @ -2.62% | Est @ -1.06% | Est @ 0.02% | Est @ 0.78% | Est @ 1.32% | Est @ 1.69% | Est @ 1.95% |
Present Value (₩, Millions) Discounted @ 8.5% | ₩11.1k | ₩9.3k | ₩8.2k | ₩7.3k | ₩6.7k | ₩6.2k | ₩5.7k | ₩5.4k | ₩5.0k | ₩4.7k |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₩70b
We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 8.5%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = ₩11b× (1 + 2.6%) ÷ (8.5%– 2.6%) = ₩183b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= ₩183b÷ ( 1 + 8.5%)10= ₩81b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₩150b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of ₩3.4k, the company appears about fair value at a 16% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.
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 KidariStudio 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 8.5%, which is based on a levered beta of 1.265. 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 KidariStudio
- Debt is not viewed as a risk.
- Dividend is low compared to the top 25% of dividend payers in the Interactive Media and Services market.
- Forecast to reduce losses next year.
- Has sufficient cash runway for more than 3 years based on current free cash flows.
- Current share price is below our estimate of fair value.
- No apparent threats visible for A020120.
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 example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For KidariStudio, we've compiled three fundamental items you should consider:
- Risks: Every company has them, and we've spotted 2 warning signs for KidariStudio you should know about.
- Future Earnings: How does A020120'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 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 KOSE every day. If you want to find the calculation for other stocks just search here.
Valuation is complex, but we're here to simplify it.
Discover if KidariStudio might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
Access Free AnalysisHave feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
About KOSE:A020120
KidariStudio
Develops and distributes media content in South Korea and internationally.