A Look At The Intrinsic Value Of HORNG SHIUE HOLDING Co., Ltd. (TWSE:2243)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, HORNG SHIUE HOLDING fair value estimate is NT$20.14
• HORNG SHIUE HOLDING's NT$23.00 share price indicates it is trading at similar levels as its fair value estimate
• When compared to theindustry average discount of -70%, HORNG SHIUE HOLDING's competitors seem to be trading at a greater premium to fair value

Does the July share price for HORNG SHIUE HOLDING Co., Ltd. (TWSE:2243) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by projecting its future cash flows and then discounting them to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Believe it or not, it's not too difficult to follow, as you'll see from our example!

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.

See our latest analysis for HORNG SHIUE HOLDING

The Calculation

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 begin with, we have to get estimates of 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 discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (NT$, Millions)	NT$131.5m	NT$115.7m	NT$106.3m	NT$100.5m	NT$97.0m	NT$94.9m	NT$93.8m	NT$93.2m	NT$93.1m	NT$93.3m
Growth Rate Estimate Source	Est @ -17.62%	Est @ -12.05%	Est @ -8.14%	Est @ -5.41%	Est @ -3.49%	Est @ -2.16%	Est @ -1.22%	Est @ -0.56%	Est @ -0.10%	Est @ 0.22%
Present Value (NT$, Millions) Discounted @ 7.6%	NT$122	NT$99.9	NT$85.3	NT$75.0	NT$67.3	NT$61.2	NT$56.2	NT$51.9	NT$48.2	NT$44.9

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = NT$712m

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 1.0%. 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) = NT$93m× (1 + 1.0%) ÷ (7.6%– 1.0%) = NT$1.4b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= NT$1.4b÷ ( 1 + 7.6%)¹⁰= NT$685m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is NT$1.4b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of NT$23.0, the company appears around fair value at the time of writing. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 HORNG SHIUE HOLDING 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 1.439. 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 HORNG SHIUE HOLDING

Next Steps:

Although the valuation of a company is important, it is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. 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. 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 HORNG SHIUE HOLDING, there are three pertinent factors you should consider:

1. Risks: For instance, we've identified 2 warning signs for HORNG SHIUE HOLDING that you should be aware of.
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 Top Analyst Picks: Interested to see what the analysts are thinking? Take a look at our interactive list of analysts' top stock picks to find out what they feel might have an attractive future outlook!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the TWSE 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