key insights
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Using the dividend discount model, Avi-Tech Holdings has an estimated fair value of S$0.23.
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The current share price of S$0.27 suggests that Avi-Tech Holdings may be trading close to its fair value
How far is Avi-Tech Holdings Limited (SGX:1R6) from its intrinsic value? Using the latest financial data, we can estimate its future cash flows and discount them to today’s value. Check to see if the stock is reasonably priced. For this purpose, we utilize a discounted cash flow (DCF) model. Please read it before you think you don’t understand it. It’s actually much less complicated than you might imagine.
It’s worth pointing out that DCF isn’t perfect for every situation, as companies are valued in many different ways. 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 Avi-Tech Holdings.
model
Avi-Tech Holdings is a semiconductor company, so we have to calculate its value a little differently than other stocks. 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. Although this often undervalues the stock, it can still be a good comparison to its competitors. We use the Gordon Growth Model, which assumes dividends will grow at a sustainable rate forever. For a variety of reasons, a very conservative growth rate is used that cannot exceed the company’s gross domestic product (GDP). In this case, we used the five-year average of the 10-year government bond yield (2.1%). The expected dividend per share is discounted to its current value at a cost of capital of 9.0%. Compared to the current share price of S$0.3, the company’s fair value is considered to be approximately fair value at the time of writing. It is best to view this as a rough estimate, not accurate to the last cent, as the assumptions in the calculations have a significant impact on the valuation.
Value per share = Expected dividend per share / (discount rate – perpetual growth rate)
= SGD 0.02 / (9.0% – 2.1%)
= 0.2 Singapore dollar
Important prerequisites
Now, the most important input to discounted cash flows is the discount rate and, of course, the actual cash flows. Part of investing is making your own assessment of a company’s future performance. So check your assumptions by doing your own calculations. 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 Avi-Tech Holdings 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 9.0% based on a leverage beta of 1.504. Beta is a measure of a stock’s volatility compared 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 Avi-Tech Holdings
strength
Weakness
opportunity
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For the future:
A company’s valuation is important, but it shouldn’t be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. If possible, it’s a good idea to apply different cases and assumptions and see how they affect the company’s valuation. For example, changes in a company’s cost of equity or risk-free rate can have a significant impact on valuations. We’ve put together three fundamental things you should consider further when it comes to Avi-Tech Holdings.
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risk: Case in point, we found 3 warning signs for Avi-Tech Holdings You should know and not one of them should be ignored.
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management: Are insiders taking advantage of market sentiment on 1R6’s future prospects to drive up the stock price? View our management team and board analysis with insights into CEO compensation and governance factors.
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Other solid 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 stocks in Singapore daily, so if you want to know the intrinsic value of other stocks, search here.
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This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst forecasts, and articles are not intended to be 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.