Is There An Opportunity With Zhen Ding Technology Holding Limited’s (TPE:4958) 23% Undervaluation? – Simply Wall St News - Republik City News
Tech

Is There An Opportunity With Zhen Ding Technology Holding Limited’s (TPE:4958) 23% Undervaluation? – Simply Wall St News

[ad_1]

How far off is Zhen Ding Technology Holding Limited (TPE:4958) from its intrinsic value? Using the most recent financial data, we’ll take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to their present value. This is done using the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!

Remember though, that there are many ways to estimate a company’s value, and a DCF is just one method. 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.

View our latest analysis for Zhen Ding Technology Holding

The calculation

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. Where possible we use analyst estimates, but when these aren’t available we extrapolate the previous free cash flow (FCF) from the last estimate or 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

2020 2021 2022 2023 2024 2025 2026 2027 2028 2029
Levered FCF (NT$, Millions) NT$10.4b NT$11.4b NT$12.2b NT$12.7b NT$13.2b NT$13.5b NT$13.8b NT$14.0b NT$14.2b NT$14.4b
Growth Rate Estimate Source Analyst x3 Analyst x1 Est @ 6.27% Est @ 4.6% Est @ 3.43% Est @ 2.62% Est @ 2.04% Est @ 1.64% Est @ 1.36% Est @ 1.17%
Present Value (NT$, Millions) Discounted @ 8.2% NT$9.6k NT$9.8k NT$9.6k NT$9.3k NT$8.9k NT$8.4k NT$7.9k NT$7.5k NT$7.0k NT$6.5k

(“Est” = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = NT$84b

After calculating the present value of future cash flows in the intial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 10-year government bond rate of 0.7%. We discount the terminal cash flows to today’s value at a cost of equity of 8.2%.

Terminal Value (TV)= FCF2029 × (1 + g) ÷ (r – g) = NT$14b× (1 + 0.7%) ÷ 8.2%– 0.7%) = NT$193b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= NT$193b÷ ( 1 + 8.2%)10= NT$88b

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$172b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of NT$147, the company appears a touch undervalued at a 23% discount to where the stock price trades currently. 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.

TSEC:4958 Intrinsic value, January 6th 2020
TSEC:4958 Intrinsic value, January 6th 2020

The assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. If you don’t agree with these result, have a go at the calculation yourself and play with the 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 Zhen Ding Technology 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 8.2%, which is based on a levered beta of 1.184. 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:

Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching 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?” 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. What is the reason for the share price to differ from the intrinsic value? For Zhen Ding Technology Holding, I’ve compiled three fundamental factors you should further research:

  1. Financial Health: Does 4958 have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
  2. Future Earnings: How does 4958’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: Are there other high quality stocks you could be holding instead of 4958? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the TSEC every day. If you want to find the calculation for other stocks just search here.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.

Discounted cash flow calculation for every stock

Simply Wall St does a detailed discounted cash flow calculation every 6 hours for every stock on the market, so if you want to find the intrinsic value of any company just search here. It’s FREE.

[ad_2]

Website | + posts

Republik City News is a subsidiary of SuccessValley, an online network community for students and aspiring entrepreneurs. You can reach SuccessValley through this link: https://www.successvalley.tech/

Leave a Comment