Calculating The Intrinsic Value Of Daxin Materials Corporation (TWSE:5234)

Key Insights

• Daxin Materials' estimated fair value is NT$126 based on 2 Stage Free Cash Flow to Equity
• Current share price of NT$139 suggests Daxin Materials is potentially trading close to its fair value
• When compared to theindustry average discount of -127%, Daxin Materials' competitors seem to be trading at a greater premium to fair value

In this article we are going to estimate the intrinsic value of Daxin Materials Corporation (TWSE:5234) by projecting its future cash flows and then discounting them to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.

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. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

View our latest analysis for Daxin Materials

Is Daxin Materials Fairly Valued?

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. 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.

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) forecast

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (NT$, Millions)	NT$547.3m	NT$569.6m	NT$587.5m	NT$602.2m	NT$614.6m	NT$625.4m	NT$634.9m	NT$643.7m	NT$651.9m	NT$659.7m
Growth Rate Estimate Source	Est @ 5.36%	Est @ 4.06%	Est @ 3.15%	Est @ 2.51%	Est @ 2.06%	Est @ 1.75%	Est @ 1.53%	Est @ 1.38%	Est @ 1.27%	Est @ 1.20%
Present Value (NT$, Millions) Discounted @ 5.6%	NT$518	NT$511	NT$499	NT$484	NT$468	NT$450	NT$433	NT$415	NT$398	NT$382

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = NT$4.6b

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. 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 (1.0%) 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 5.6%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = NT$660m× (1 + 1.0%) ÷ (5.6%– 1.0%) = NT$14b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= NT$14b÷ ( 1 + 5.6%)¹⁰= NT$8.4b

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$13b. 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$139, 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

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 Daxin Materials 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 5.6%, which is based on a levered beta of 0.949. 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. 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 Daxin Materials, there are three fundamental elements you should look at:

1. Risks: Case in point, we've spotted 3 warning signs for Daxin Materials you should be aware of, and 1 of them is concerning.
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. Simply Wall St updates its DCF calculation for every Taiwanese stock every day, so if you want to find the intrinsic value of any other stock 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.