Stock Analysis
- South Korea
- /
- Semiconductors
- /
- KOSDAQ:A218410
A Look At The Intrinsic Value Of RFHIC Corporation (KOSDAQ:218410)
Key Insights
- The projected fair value for RFHIC is ₩12,752 based on 2 Stage Free Cash Flow to Equity
- With ₩11,150 share price, RFHIC appears to be trading close to its estimated fair value
- RFHIC's peers are currently trading at a premium of 163% on average
Today we will run through one way of estimating the intrinsic value of RFHIC Corporation (KOSDAQ:218410) by estimating the company's future cash flows and discounting them to their present value. Our analysis will employ the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.
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. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.
Check out our latest analysis for RFHIC
The Method
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, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) estimate
2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | |
Levered FCF (₩, Millions) | -₩27.0b | ₩13.0b | ₩17.4b | ₩21.8b | ₩25.7b | ₩29.1b | ₩32.1b | ₩34.6b | ₩36.8b | ₩38.7b |
Growth Rate Estimate Source | Analyst x1 | Analyst x1 | Est @ 34.19% | Est @ 24.70% | Est @ 18.06% | Est @ 13.41% | Est @ 10.15% | Est @ 7.88% | Est @ 6.28% | Est @ 5.16% |
Present Value (₩, Millions) Discounted @ 9.7% | -₩24.6k | ₩10.8k | ₩13.2k | ₩15.0k | ₩16.1k | ₩16.7k | ₩16.7k | ₩16.5k | ₩15.9k | ₩15.3k |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₩112b
The second stage is also known as Terminal Value, this is the business's cash flow after 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 2.6%. We discount the terminal cash flows to today's value at a cost of equity of 9.7%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = ₩39b× (1 + 2.6%) ÷ (9.7%– 2.6%) = ₩553b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= ₩553b÷ ( 1 + 9.7%)10= ₩219b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₩330b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of ₩11k, the company appears about fair value at a 13% 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.
The Assumptions
Now 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 RFHIC 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 9.7%, which is based on a levered beta of 1.519. 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 RFHIC
- Earnings growth over the past year exceeded the industry.
- Cash in surplus of total debt.
- Dividend is low compared to the top 25% of dividend payers in the Semiconductor market.
- Annual revenue is forecast to grow faster than the South Korean market.
- Current share price is below our estimate of fair value.
- Debt is not well covered by operating cash flow.
- Paying a dividend but company has no free cash flows.
Looking Ahead:
Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/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 RFHIC, we've compiled three additional aspects you should look at:
- Risks: For example, we've discovered 2 warning signs for RFHIC that you should be aware of before investing here.
- Future Earnings: How does A218410'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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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:A218410
RFHIC
Designs and manufactures radio frequency (RF) and microwave components for wireless infrastructure, commercial and military radar, and RF energy applications in South Korea and internationally.