ASMedia Technology Inc. (TWSE:5269) Shares Could Be 24% Above Their Intrinsic Value Estimate

Key Insights

• ASMedia Technology's estimated fair value is NT$1,361 based on 2 Stage Free Cash Flow to Equity
• Current share price of NT$1,685 suggests ASMedia Technology is potentially 24% overvalued
• Our fair value estimate is 38% lower than ASMedia Technology's analyst price target of NT$2,197

In this article we are going to estimate the intrinsic value of ASMedia Technology Inc. (TWSE:5269) 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. It may sound complicated, but actually it is quite simple!

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

See our latest analysis for ASMedia Technology

The Calculation

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

10-year free cash flow (FCF) estimate

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (NT$, Millions)	NT$4.42b	NT$5.20b	NT$5.76b	NT$6.22b	NT$6.58b	NT$6.87b	NT$7.10b	NT$7.29b	NT$7.45b	NT$7.59b
Growth Rate Estimate Source	Analyst x2	Analyst x1	Est @ 10.79%	Est @ 7.87%	Est @ 5.82%	Est @ 4.39%	Est @ 3.39%	Est @ 2.69%	Est @ 2.20%	Est @ 1.85%
Present Value (NT$, Millions) Discounted @ 7.4%	NT$4.1k	NT$4.5k	NT$4.6k	NT$4.7k	NT$4.6k	NT$4.5k	NT$4.3k	NT$4.1k	NT$3.9k	NT$3.7k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = NT$43b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this 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 have used the 5-year average of the 10-year government bond yield (1.1%) 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 7.4%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = NT$7.6b× (1 + 1.1%) ÷ (7.4%– 1.1%) = NT$120b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= NT$120b÷ ( 1 + 7.4%)¹⁰= NT$59b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is NT$102b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of NT$1.7k, the company appears slightly overvalued at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

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 ASMedia Technology 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 7.4%, which is based on a levered beta of 1.317. 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.

SWOT Analysis for ASMedia Technology

Looking Ahead:

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. 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 instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. What is the reason for the share price exceeding the intrinsic value? For ASMedia Technology, we've put together three relevant elements you should assess:

1. Risks: Every company has them, and we've spotted 2 warning signs for ASMedia Technology you should know about.
2. Future Earnings: How does 5269'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. 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.