Calculating The Intrinsic Value Of Wireless Power Amplifier Module Inc. (KOSDAQ:332570)

Key Insights

• Wireless Power Amplifier Module's estimated fair value is ₩4,394 based on 2 Stage Free Cash Flow to Equity
• Wireless Power Amplifier Module's ₩4,740 share price indicates it is trading at similar levels as its fair value estimate
• When compared to theindustry average discount of -559%, Wireless Power Amplifier Module's competitors seem to be trading at a greater premium to fair value

Today we will run through one way of estimating the intrinsic value of Wireless Power Amplifier Module Inc. (KOSDAQ:332570) by taking the expected future cash flows and discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. 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 Wireless Power Amplifier Module

What's The Estimated Valuation?

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. In the first stage we need to estimate the cash flows to the business over the next ten years. 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) estimate

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (₩, Millions)	₩13.0b	₩12.2b	₩11.8b	₩11.6b	₩11.5b	₩11.6b	₩11.7b	₩11.9b	₩12.1b	₩12.4b
Growth Rate Estimate Source	Est @ -9.99%	Est @ -6.19%	Est @ -3.54%	Est @ -1.68%	Est @ -0.38%	Est @ 0.53%	Est @ 1.17%	Est @ 1.62%	Est @ 1.93%	Est @ 2.15%
Present Value (₩, Millions) Discounted @ 8.3%	₩12.0k	₩10.4k	₩9.3k	₩8.4k	₩7.7k	₩7.2k	₩6.7k	₩6.3k	₩5.9k	₩5.6k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₩79b

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 (2.7%) 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 8.3%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = ₩12b× (1 + 2.7%) ÷ (8.3%– 2.7%) = ₩226b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ₩226b÷ ( 1 + 8.3%)¹⁰= ₩102b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₩181b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of ₩4.7k, the company appears around fair value at the time of writing. 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

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. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 Wireless Power Amplifier Module 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 8.3%, which is based on a levered beta of 1.193. 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.

Looking Ahead:

Although the valuation of a company is important, it is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. 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 instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Wireless Power Amplifier Module, there are three relevant elements you should assess:

1. Risks: For example, we've discovered 3 warning signs for Wireless Power Amplifier Module that you should be aware of before investing here.
2. 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!
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.