key insights
- The estimated fair value of Arcadyan Technology is NT$181 based on the dividend discount model.
- Arcadyan Technology's stock price of NT$185 indicates it is trading at a level similar to its fair value estimate
- Analyst price target for 3596 NT$194 is 7.2% above our fair value estimate
How far is Arcadyan Technology Corporation (TWSE:3596) from its intrinsic value? Using the latest financial data to estimate a company's future cash flows and discounting them to their present value, Check whether it is appropriate. This is done using a discounted cash flow (DCF) model. It may sound complicated, but it's actually very easy!
Note that there are many different ways to value a company, and like DCFs, each method has advantages and disadvantages in certain scenarios. If you still have doubts about this type of valuation, take a look at the Simply Wall St analysis model.
Check out our latest analysis for Arcadyan Technology.
Method
Arcadyan Technology operates in the telecommunications sector, so we have to calculate its intrinsic value a little differently. Instead of using free cash flow, which is difficult to estimate in this industry and often not reported by analysts, dividend per share (DPS) payments are used. Unless the company pays out a significant portion of its FCF as dividends, this method typically results in the stock being undervalued. The 'Gordon Growth Model' is used, which simply assumes that dividend payments continue to increase at a sustainable growth rate forever. Dividends are expected to grow at an annual growth rate comparable to the five-year average 0.8% yield on the 10-year Treasury. This number is then discounted to its current value at a cost of equity of 6.0%. Compared to the current share price of NT$185, the company's fair value is considered to be approximately fair value at the time of writing. The assumptions in the calculations have a significant impact on the valuation, so it's best to view this as a rough estimate rather than an exact estimate down to the last cent.
Value per share = Expected dividend per share / (discount rate – perpetual growth rate)
= NT$9.4 / (6.0% – 0.8%)
= NT$181
Important prerequisites
The above calculation relies heavily on two assumptions. One is the discount rate and the other is the cash flow. You are not required to agree to these inputs. I encourage you to redo the calculations yourself and give it a try. Additionally, DCF does not give a complete picture of a company's potential performance because it does not take into account the cyclicality of the industry or the company's future capital requirements. Given that we are considering Arcadyan Technology as a potential shareholder, the cost of equity is used as the discount rate, rather than the cost of equity taking into account debt (or weighted average cost of capital, WACC). For this calculation, we used 6.0% based on a leverage beta of 0.953. Beta is a measure of a stock's volatility in comparison to the market as a whole. Beta values are derived from industry average beta values for globally comparable companies and are constrained to a range of 0.8 to 2.0, which is a reasonable range for stable businesses.
SWOT analysis of Arcadyan technology
- Earnings growth over the past year has outpaced the industry.
- Debt is not considered a risk.
- Dividends are covered by profits and cash flow.
- The dividend is low compared to the top 25% of dividend payers in the telecom market.
- Annual revenue is expected to increase over the next two years.
- Superior value based on P/E compared to estimated fair P/E.
- Annual profit growth is expected to be slower than the Taiwanese market.
to the next:
Although important, the DCF calculation ideally is not the only part of the analysis that a company scrutinizes. It is not possible to obtain a reliable valuation with the DCF model. Rather, it should be viewed as a guide to “What assumptions need to hold true for this stock to be undervalued/overvalued?” Outcomes can vary widely if companies grow at different rates or if their cost of equity or risk-free rate changes rapidly. We've summarized three basic elements to consider when it comes to Arcadyan Technology.
- risk: Please note. 1 warning sign for Arcadyan Technology We discovered the following before considering investing in the company:
- future earnings: How does 3596's growth rate compare to its peers and the broader market? Explore the analyst consensus numbers for the coming years in more detail by interacting with the free Analyst Growth Expectations chart.
- Other strong businesses: Low debt, high return on equity, and good past performance are the fundamentals of a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you haven't considered before?
PS. Simply Wall St updates DCF calculations for all Taiwanese stocks daily, so if you want to know the intrinsic value of other stocks, search here.
Valuation is complex, but we help make it simple.
Check out our comprehensive analysis, including below, to see if Arcadyan Technology is potentially overvalued or undervalued. Fair value estimates, risks and caveats, dividends, insider trading, and financial health.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodologies, and the articles are not intended as financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
