ASUSTeK Computer Inc.’s intrinsic value (TPE: 2357) is potentially 46% higher than its price per share
In this article, we’ll estimate the intrinsic value of ASUSTeK Computer Inc. (TPE: 2357) by taking the company’s future cash flow forecasts and discounting them to their present value. We will therefore take advantage of the Discounted Cash Flow (DCF) model. Don’t be put off by the lingo, the math is actually pretty straightforward.
There are many ways that businesses can be valued, so we would like to stress that a DCF is not perfect for all situations. For those who are learning equity analysis in depth, the Simply Wall St analysis template here may be of interest to you.
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Crunch the numbers
We are going to use a two-step DCF model which, as the name suggests, takes into account two stages of growth. The first stage is usually a period of higher growth which stabilizes towards the terminal value, captured in the second period of “steady growth”. First, we need to estimate the cash flow of the business over the next ten years. Where possible, we use analyst estimates, but when these are not available, we extrapolate the previous free cash flow (FCF) from the last estimate or the last reported value. We assume that companies with decreasing free cash flow will slow their withdrawal rate, and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect that growth tends to slow down more in the early years than in the later years.
A DCF is based on the idea that a dollar in the future is worth less 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) estimate
|Leverage FCF (NT $, millions)||NT $ 26.7 billion||NT $ 27.4 billion||NT $ 28.0 billion||NT $ 28.4 billion||NT $ 28.8 billion||NT $ 29.2 billion||NT $ 29.5 billion||NT $ 29.8 billion||NT $ 30.1 billion||NT $ 30.4 billion|
|Source of estimated growth rate||Analyst x3||Analyst x3||Is at 1.96%||Is at 1.62%||Is 1.38%||Is 1.22%||Is 1.1%||Is 1.02%||Is 0.96%||Is 0.92%|
|Present value (NT $, millions) discounted at 7.7%||NT $ 24.8,000||NT $ 23.7 thousand||NT $ 22.4 thousand||NT $ 21.2k||NT $ 19.9 thousand||NT $ 18.7 thousand||17.6 kT $||NT $ 16.5,000||NT $ 15.5,000||NT $ 14.5,000|
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flow (PVCF) = NT $ 195 billion
Now we need to calculate the terminal value, which takes into account all future cash flows after that ten year period. 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 used the 5-year average of the 10-year government bond yield (0.8%) to estimate future growth. Similar to the 10 year “growth” period, we discount future cash flows to present value, using a cost of equity of 7.7%.
Terminal value (TV)= FCF2030 × (1 + g) ÷ (r – g) = NT $ 30 billion × (1 + 0.8%) ÷ (7.7% – 0.8%) = NT $ 448 billion
Present value of terminal value (PVTV)= TV / (1 + r)ten= NT $ 448 billion ÷ (1 + 7.7%)ten= NT $ 214 billion
The total value, or equity value, is then the sum of the present value of future cash flows, which in this case is NT $ 409 billion. To get the intrinsic value per share, we divide it by the total number of shares outstanding. Compared to the current share price of NT $ 378, the company appears to be quite undervalued with a 31% discount from the current share price. Remember though, this is only a rough estimate, and like any complex formula – garbage in, garbage out.
We draw your attention to the fact that the most important data for a discounted cash flow is the discount rate and of course the actual cash flow. If you don’t agree with these results, try the calculation yourself and play with the assumptions. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we view ASUSTeK Computer 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 takes debt into account. In this calculation, we used 7.7%, which is based on a leveraged beta of 1.116. Beta is a measure of the volatility of a stock, relative 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.
To move on:
While valuing a business is important, it is only one of the many factors you need to assess for a business. The DCF model is not a perfect inventory valuation tool. Preferably, you would apply different cases and assumptions and see how they would impact the valuation of the business. If a business grows at a different rate, or if its cost of equity or risk-free rate changes sharply, output can be very different. What is the reason why the stock price is lower than intrinsic value? For ASUSTeK Computer, we’ve put together three essentials you should review:
- Risks: Take risks, for example – ASUSTeK Computer has 2 warning signs (and 1 that can’t be ignored) we think you should know.
- Future income: How does 2357’s growth rate compare to its competition and the overall market? Dig deeper into the analyst consensus count for years to come by interacting with our free analyst growth forecast chart.
- Other high quality alternatives: Do you like a good all-rounder? Explore our interactive list of high quality inventory to get a feel for what you might 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 Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take into account your goals or your financial situation. We aim to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative information. Simply Wall St has no position in any of the stocks mentioned.
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