Estimating The Intrinsic Value Of Symtek Automation Asia Co., Ltd. (TWSE:6438)

Key Insights

• The projected fair value for Symtek Automation Asia is NT$257 based on 2 Stage Free Cash Flow to Equity
• With NT$224 share price, Symtek Automation Asia appears to be trading close to its estimated fair value
• The average premium for Symtek Automation Asia's competitorsis currently 799%

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Symtek Automation Asia Co., Ltd. (TWSE:6438) as an investment opportunity by projecting its future cash flows and then discounting them to today's 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.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

Check out our latest analysis for Symtek Automation Asia

What's The Estimated Valuation?

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 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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, 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 (NT$, Millions)	NT$382.3m	NT$529.4m	NT$673.7m	NT$804.3m	NT$916.0m	NT$1.01b	NT$1.08b	NT$1.14b	NT$1.19b	NT$1.23b
Growth Rate Estimate Source	Est @ 54.51%	Est @ 38.47%	Est @ 27.25%	Est @ 19.39%	Est @ 13.89%	Est @ 10.03%	Est @ 7.34%	Est @ 5.45%	Est @ 4.13%	Est @ 3.21%
Present Value (NT$, Millions) Discounted @ 6.2%	NT$360	NT$469	NT$562	NT$632	NT$678	NT$702	NT$710	NT$704	NT$691	NT$671

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = NT$6.2b

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 (1.1%) 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 6.2%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = NT$1.2b× (1 + 1.1%) ÷ (6.2%– 1.1%) = NT$24b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= NT$24b÷ ( 1 + 6.2%)¹⁰= NT$13b

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$19b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of NT$224, 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.

Important 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. 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 Symtek Automation Asia 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 6.2%, which is based on a levered beta of 1.064. 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 Symtek Automation Asia

Looking Ahead:

Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Symtek Automation Asia, we've put together three relevant elements you should consider:

1. Risks: You should be aware of the 2 warning signs for Symtek Automation Asia we've uncovered before considering an investment in the company.
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 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.