Calculating The Fair Value Of Hana Materials Inc. (KOSDAQ:166090)

Key Insights

• The projected fair value for Hana Materials is ₩36,961 based on 2 Stage Free Cash Flow to Equity
• Current share price of ₩40,300 suggests Hana Materials is potentially trading close to its fair value
• Analyst price target for A166090 is ₩43,400, which is 17% above our fair value estimate

In this article we are going to estimate the intrinsic value of Hana Materials Inc. (KOSDAQ:166090) by taking the expected future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Believe it or not, it's not too difficult to follow, as you'll see from our example!

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

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Is Hana Materials Fairly Valued?

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. 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 discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

	2026	2027	2028	2029	2030	2031	2032	2033	2034	2035
Levered FCF (₩, Millions)	₩46.2b	₩53.5b	₩59.0b	₩63.8b	₩68.0b	₩71.8b	₩75.1b	₩78.3b	₩81.3b	₩84.2b
Growth Rate Estimate Source	Analyst x3	Analyst x2	Est @ 10.33%	Est @ 8.12%	Est @ 6.57%	Est @ 5.49%	Est @ 4.74%	Est @ 4.21%	Est @ 3.84%	Est @ 3.58%
Present Value (₩, Millions) Discounted @ 12%	₩41.4k	₩43.0k	₩42.6k	₩41.3k	₩39.4k	₩37.3k	₩35.0k	₩32.7k	₩30.5k	₩28.3k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₩372b

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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 (3.0%) 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 12%.

Terminal Value (TV)= FCF₂₀₃₅ × (1 + g) ÷ (r – g) = ₩84b× (1 + 3.0%) ÷ (12%– 3.0%) = ₩1.0t

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ₩1.0t÷ ( 1 + 12%)¹⁰= ₩341b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₩713b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of ₩40k, 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. 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 Hana 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 12%, which is based on a levered beta of 1.730. 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.

See our latest analysis for Hana Materials

SWOT Analysis for Hana Materials

Moving On:

Although the valuation of a company is important, it is only one of many factors that you need to assess for a company. It's not possible to obtain a foolproof valuation with a DCF model. 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 Hana Materials, we've put together three additional factors you should further research:

1. Risks: We feel that you should assess the 1 warning sign for Hana Materials we've flagged before making an investment in the company.
2. Future Earnings: How does A166090'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 South Korean 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.