Calculating The Fair Value Of Inzisoft Co.,Ltd. (KOSDAQ:100030)

Key Insights

• The projected fair value for InzisoftLtd is ₩14,647 based on 2 Stage Free Cash Flow to Equity
• Current share price of ₩15,250 suggests InzisoftLtd is potentially trading close to its fair value
• When compared to theindustry average discount of -1,636%, InzisoftLtd's competitors seem to be trading at a greater premium to fair value

Does the January share price for Inzisoft Co.,Ltd. (KOSDAQ:100030) reflect what it's really worth? Today, we will estimate the stock's intrinsic value 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. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. 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 InzisoftLtd

The Calculation

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. To start off with, we need to estimate the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last 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.

Generally we assume that a dollar today is more valuable than a dollar in the future, 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

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (₩, Millions)	₩3.23b	₩2.77b	₩2.51b	₩2.37b	₩2.29b	₩2.26b	₩2.26b	₩2.27b	₩2.30b	₩2.34b
Growth Rate Estimate Source	Est @ -21.70%	Est @ -14.39%	Est @ -9.27%	Est @ -5.69%	Est @ -3.19%	Est @ -1.43%	Est @ -0.21%	Est @ 0.65%	Est @ 1.26%	Est @ 1.68%
Present Value (₩, Millions) Discounted @ 7.6%	₩3.0k	₩2.4k	₩2.0k	₩1.8k	₩1.6k	₩1.5k	₩1.3k	₩1.3k	₩1.2k	₩1.1k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₩17b

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 2.7%. We discount the terminal cash flows to today's value at a cost of equity of 7.6%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = ₩2.3b× (1 + 2.7%) ÷ (7.6%– 2.7%) = ₩48b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ₩48b÷ ( 1 + 7.6%)¹⁰= ₩23b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₩40b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of ₩15k, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

The 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. 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 InzisoftLtd 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 7.6%, which is based on a levered beta of 1.054. 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.

Next Steps:

Whilst important, the DCF calculation is only one of many factors that you need to assess for 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 example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For InzisoftLtd, we've put together three relevant factors you should assess:

1. Risks: As an example, we've found 1 warning sign for InzisoftLtd that you need to consider before investing here.
2. 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!
3. Other Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!

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.