Daewoong Pharmaceutical Co., Ltd (KRX:069620) Shares Could Be 44% Below Their Intrinsic Value Estimate

Key Insights

• Daewoong Pharmaceutical's estimated fair value is ₩325,331 based on 2 Stage Free Cash Flow to Equity
• Daewoong Pharmaceutical is estimated to be 44% undervalued based on current share price of ₩180,800
• Our fair value estimate is 53% higher than Daewoong Pharmaceutical's analyst price target of ₩213,000

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Daewoong Pharmaceutical Co., Ltd (KRX:069620) as an investment opportunity by projecting its future cash flows and then discounting them to today's value. This will be done using 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. 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 Daewoong Pharmaceutical 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. In the first stage we need to estimate the cash flows to the business over the next ten years. 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

	2026	2027	2028	2029	2030	2031	2032	2033	2034	2035
Levered FCF (₩, Millions)	₩131.3b	₩141.7b	₩149.9b	₩157.3b	₩164.1b	₩170.6b	₩176.8b	₩182.9b	₩188.9b	₩195.0b
Growth Rate Estimate Source	Analyst x3	Analyst x3	Est @ 5.79%	Est @ 4.94%	Est @ 4.35%	Est @ 3.94%	Est @ 3.65%	Est @ 3.44%	Est @ 3.30%	Est @ 3.20%
Present Value (₩, Millions) Discounted @ 6.9%	₩122.8k	₩123.9k	₩122.6k	₩120.3k	₩117.4k	₩114.2k	₩110.7k	₩107.1k	₩103.4k	₩99.8k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₩1.1t

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. 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 3.0%. We discount the terminal cash flows to today's value at a cost of equity of 6.9%.

Terminal Value (TV)= FCF₂₀₃₅ × (1 + g) ÷ (r – g) = ₩195b× (1 + 3.0%) ÷ (6.9%– 3.0%) = ₩5.1t

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ₩5.1t÷ ( 1 + 6.9%)¹⁰= ₩2.6t

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ₩3.7t. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of ₩181k, the company appears quite undervalued at a 44% 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.

Important 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 Daewoong Pharmaceutical 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 6.9%, which is based on a levered beta of 0.800. 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.

View our latest analysis for Daewoong Pharmaceutical

SWOT Analysis for Daewoong Pharmaceutical

Moving On:

Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Why is the intrinsic value higher than the current share price? For Daewoong Pharmaceutical, we've compiled three further aspects you should explore:

1. Risks: Be aware that Daewoong Pharmaceutical is showing 2 warning signs in our investment analysis , and 1 of those is potentially serious...
2. Future Earnings: How does A069620'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 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!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the KOSE 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.