Stock Analysis
- South Korea
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- Semiconductors
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- KOSDAQ:A213420
An Intrinsic Calculation For Duk San Neolux Co.,Ltd (KOSDAQ:213420) Suggests It's 50% Undervalued
Key Insights
- Using the 2 Stage Free Cash Flow to Equity, Duk San NeoluxLtd fair value estimate is ₩60,620
- Duk San NeoluxLtd is estimated to be 50% undervalued based on current share price of ₩30,550
- Our fair value estimate is 14% higher than Duk San NeoluxLtd's analyst price target of ₩53,000
How far off is Duk San Neolux Co.,Ltd (KOSDAQ:213420) 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 expected future cash flows and discounting them 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.
We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
Check out our latest analysis for Duk San NeoluxLtd
Crunching The Numbers
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.
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
2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | |
Levered FCF (₩, Millions) | ₩47.3b | ₩63.6b | ₩76.2b | ₩87.2b | ₩96.8b | ₩105.0b | ₩112.0b | ₩118.1b | ₩123.5b | ₩128.4b |
Growth Rate Estimate Source | Analyst x5 | Analyst x2 | Est @ 19.70% | Est @ 14.56% | Est @ 10.96% | Est @ 8.44% | Est @ 6.68% | Est @ 5.44% | Est @ 4.58% | Est @ 3.97% |
Present Value (₩, Millions) Discounted @ 8.8% | ₩43.5k | ₩53.8k | ₩59.1k | ₩62.3k | ₩63.5k | ₩63.3k | ₩62.1k | ₩60.1k | ₩57.8k | ₩55.2k |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₩581b
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 2.6%. We discount the terminal cash flows to today's value at a cost of equity of 8.8%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = ₩128b× (1 + 2.6%) ÷ (8.8%– 2.6%) = ₩2.1t
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= ₩2.1t÷ ( 1 + 8.8%)10= ₩908b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₩1.5t. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of ₩31k, the company appears quite undervalued at a 50% 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.
The 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 Duk San NeoluxLtd 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 8.8%, which is based on a levered beta of 1.322. 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 Duk San NeoluxLtd
- Earnings growth over the past year exceeded the industry.
- Debt is not viewed as a risk.
- No major weaknesses identified for A213420.
- Annual revenue is forecast to grow faster than the South Korean market.
- Trading below our estimate of fair value by more than 20%.
- Annual earnings are forecast to grow slower than the South Korean market.
Moving On:
Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. What is the reason for the share price sitting below the intrinsic value? For Duk San NeoluxLtd, we've put together three further items you should look at:
- Financial Health: Does A213420 have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
- Future Earnings: How does A213420'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. 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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Have 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 KOSDAQ:A213420
Duk San NeoluxLtd
Develops and manufactures OLED materials for display industry in South Korea.