A Look At The Fair Value Of Karin Technology Holdings Limited (SGX:K29)

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Simply Wall St

Sat, Sep 16, 2023, 8:36 PM 5 min read

Karin Technology Holdings' estimated fair value is S$0.35 based on Dividend Discount Model
Karin Technology Holdings' S$0.34 share price indicates it is trading at similar levels as its fair value estimate
When compared to theindustry average discount to fair value of 17%, Karin Technology Holdings' competitors seem to be trading at a greater discount

In this article we are going to estimate the intrinsic value of Karin Technology Holdings Limited (SGX:K29) by taking the expected future cash flows and discounting them to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

View our latest analysis for Karin Technology Holdings

Crunching The Numbers

As Karin Technology Holdings operates in the electronic sector, we need to calculate the intrinsic value slightly differently. In this approach dividends per share (DPS) are used, as free cash flow is difficult to estimate and often not reported by analysts. This often underestimates the value of a stock, but it can still be good as a comparison to competitors. The 'Gordon Growth Model' is used, which simply assumes that dividend payments will continue to increase at a sustainable growth rate forever. The dividend is expected to grow at an annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.0%. We then discount this figure to today's value at a cost of equity of 9.5%. Relative to the current share price of S$0.3, the company appears about fair value at a 2.7% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

Value Per Share = Expected Dividend Per Share / (Discount Rate - Perpetual Growth Rate)

= HK$0.2 / (9.5% – 2.0%)

= S$0.3

dcf — SGX:K29 Discounted Cash Flow September 17th 2023

Important Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 Karin Technology Holdings 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 9.5%, which is based on a levered beta of 1.275. 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 Karin Technology Holdings

Strength

Earnings growth over the past year exceeded the industry.

Debt is well covered by cash flow.

Dividend is in the top 25% of dividend payers in the market.

Weakness

Interest payments on debt are not well covered.

Opportunity

Current share price is below our estimate of fair value.

Lack of analyst coverage makes it difficult to determine K29's earnings prospects.

Threat

Dividends are not covered by earnings and cashflows.

Moving On:

Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess 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 instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Karin Technology Holdings, there are three important elements you should look at:

Risks: To that end, you should learn about the 3 warning signs we've spotted with Karin Technology Holdings (including 1 which is potentially serious) .
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!
Other Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!

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