Estimating The Fair Value Of Sigurd Microelectronics Corporation (TWSE:6257)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Sigurd Microelectronics fair value estimate is NT$67.07
• With NT$77.40 share price, Sigurd Microelectronics appears to be trading close to its estimated fair value
• Sigurd Microelectronics' peers seem to be trading at a lower premium to fair value based onthe industry average of -15%

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Sigurd Microelectronics Corporation (TWSE:6257) as an investment opportunity by estimating the company's future cash flows and discounting them to their present value. Our analysis will employ the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.

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 want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

See our latest analysis for Sigurd Microelectronics

Is Sigurd Microelectronics 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. 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.

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) estimate

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (NT$, Millions)	NT$3.02b	NT$2.78b	NT$2.64b	NT$2.55b	NT$2.50b	NT$2.48b	NT$2.47b	NT$2.46b	NT$2.47b	NT$2.48b
Growth Rate Estimate Source	Est @ -11.55%	Est @ -7.78%	Est @ -5.14%	Est @ -3.29%	Est @ -2.00%	Est @ -1.09%	Est @ -0.46%	Est @ -0.01%	Est @ 0.30%	Est @ 0.51%
Present Value (NT$, Millions) Discounted @ 8.6%	NT$2.8k	NT$2.4k	NT$2.1k	NT$1.8k	NT$1.7k	NT$1.5k	NT$1.4k	NT$1.3k	NT$1.2k	NT$1.1k

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

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 8.6%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = NT$2.5b× (1 + 1.0%) ÷ (8.6%– 1.0%) = NT$33b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= NT$33b÷ ( 1 + 8.6%)¹⁰= NT$14b

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is NT$32b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of NT$77.4, 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

Now 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 Sigurd Microelectronics 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 8.6%, which is based on a levered beta of 1.568. 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 example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Sigurd Microelectronics, there are three pertinent aspects you should further research:

1. Risks: Take risks, for example - Sigurd Microelectronics has 2 warning signs we think you should be aware of.
2. Future Earnings: How does 6257's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
3. 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!

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.