Valuation Overview

2015/06/16

Flytech vs Advantech Gani Jason Koko Roy Ulyah

OutlineValuation Methods Flytech Advantech

Arguments Conclusion

Part 1 Valuation Method

Illustrative Valuation Summary

Method

Multiple

DDM

FCF

FCFE

274.49210.5

80.62 98.5449.71640.677

55.25 60

246 450

488

337340

PEPEGMBR

FCF APV RI

Illustrative Valuation Summary

Method

Multiple

DDM

FCF

FCFE

274.49210.5

91 11111090

90

257 510

260

373372

PEPEGMBR

FCF APV RI

110

Basic ratios

WACC 5.2% 5.64609%

Ke 5.4618% 5.654%

Ku 5.22% 5.6468%

Dividend Growth

10.81% 13.79%

Dividend Discount Model

Two step method

First Stage Second Stage

2% $ 40.56 $ 195.113% $ 255.43

First Stage Second Stage

2% $ 47.39 $ 210.503% $ 274.49

Multiple-PEaverage PE

-10%average PE +10% average PE 11.82 10.64 13.00

EPS 2010 2011 2012 2013 2014Flytech 6.4 5.91 5.45 7.38 7.25

Advantech 5.51 6.44 6.23 7.26 7.8

EPS growth 2011 2012 2013 2014 averageFlytech -0.0766 -0.0778 0.3541 -0.0176 4.55%

Advantech 0.1688 -0.0326 0.1653 0.0744 9.40%

Companies 2014 EPS 2015 Estimate EPS predict RangeFlytech 7.25 7.580 89.58 80.62~98.54

Advantech 7.8 8.533 100.84 90.76~110.92

Multiple-PEGaverage

PEG -10%average

PEG +10%

average 11.818 13% 1.369 1.232 1.506

Target Companies

2014 EPS

Expected EPS

growth

PE to growth

2015 Price

2015 Price

(lower)

2015 Price

(upper)

Flytech 7.25 4.55% 1.369 45.197 40.677 49.716

Advantech 7.8 9.40% 1.369 100.361 90.325 110.398

Multiple-MBRaverage PEG

-10%average

PEG +10%

average 11.818 13% 1.3691.232 1.506

Target Companies

2014 EPS

Expected EPS

growth

PE to growth 2015 Price

2015 Price (lower)

2015 Price (upper)

Flytech 7.25 4.55% 1.369 45.197 40.677 49.716

Advantech 7.8 9.40% 1.369 100.361 90.325 110.398

FCF Model-20% -10% No change 10% 20%

-2% 246.23 274.83 303.42 332.02 360.61-1% 261.2 291.66 322.13 352.59 383.06

No change 276.16 308.5 340.83 373.17 405.51% 291.12 325.33 359.54 393.74 427.952% 306.09 342.16 378.24 414.32 450.39

-20% -10% No change 10% 20%-2% 257.22 286.25 315.29 344.33 373.37-1% 259.63 312.02 343.93 375.83 407.73

No change 303.03 337.8 372.56 407.33 442.091% 325.94 363.57 401.2 438.82 476.452% 348.84 389.34 429.83 470.32 510.81

Residual Income ModelAssumption: Zero Net Present Value Investments

APV Model

Ku : 5.22471%

Ku : 5.65%

FCFE Model

Free cash flow $558957.34

Non-operating cash flow(000)

$823840

Debt service(000) $325198

Other capital cash flow(000)

$36728

Flows to equity $1020871.34

Cost of Equity 5.2 %

Dividend growth rate 10.81%

Value 64890966.55

shares outstanding 132,947

Value per share $488.10

Free cash flow $2568956.81

Non-operating $618395.58Debt service(000) $246,901

Other capital cash flow $187000

Flows to equity(000) $2753451.39

Cost of Equity 5.65 %

Dividend growth rate 13.79%

Value 164111422.8

shares outstanding 630,103

Value per share $260.45

Valuation Result Summary

Valuation method Flytech (NT$) Advantech (NT$)

Dividend discount model 210.5-274.49 195.11-255.43

FCF 340.83 (246.23-450.39)

372.56 (257.22-510.81)

Flows to Equity 318.60 358.86

APV 337.31 373.02

RI 340.83 372.56

FCFE 488 260

Multiple valuation

PE 89.58 (80.62-98.54)

100.84 (90.76-110.92)

PEG 45.197 (40.677-49.716)

100.361 (90.325-110.398)

MBR 55.258 (55.887-60.784)

62.097 (55.887-68.307)

Part 2 Argument

Dividend Discount Model

This model values the common equity by calculating the dividend.

Although there is perpetuity period to hedge the historical period (if the previous dividend growth rate is high), some companies may be invest in some projects (especially in IoT industry) and it will decrease this year dividend but may yield a higher great return to raise dividend in the future.

Multiple Valuation PE, PEG, MBR

In Taiwan, it is hard to find the companies which have the same core operation with our target company. Also, Advantech is a special company which is doing business in hardware and software components.

PE is not suitable for those companies because the average of comparable companies PE ratio is quite low compared to our companies.

PEG is not suitable for those companies because the EPS growth of the comparable companies are vary.

Market to Book ratio is also not suitable for those companies because market to book ratio of comparable companies is low.

FCF, APV, RI Models

FCF model only focuses on the core operating items. It has some advantages because it will reflect the stock price and its real growth directly.

RI model is actually a FCF model, its value depends on the cash flow forecast implied by the book value and residual income.

Every company has its own liabilities, so by including liabilities in our evaluation, it will make a better forecast for the stock price (APV method).

Flows to Equity

Flows to Equity model is more transparent model for discussing a projects benefit to shareholder.

However, if the firms didnt maintain a constant debt-to-equity ratio, this valuation couldnt be applied.

If the debt-to-equity ratio changes over time, the risk of equityand, therefore, its cost of capitalwill change as well.

Therefore, we didnt choose this model because we thought that our firms debt-to-equity ratio might change over time.

Part 3 Conclusion

Illustrative Valuation Summary

Method

Multiple

DDM

FCF

FCFE

274.49210.5

80.62 98.5449.71640.677

55.25 60

246 450

488

337340

PEPEGMBR

FCF APV RI

EBITA*6Objective Price

314~382

Illustrative Valuation Summary

Method

Multiple

DDM

FCF

FCFE

274.49210.5

91 11111090

90

257 510

260

373372

PEPEGMBR

FCF APV RI

110

Objective Price 341~426

Conclusion The suitable model for Flytech and Advantech

are APV model. These are NT$ 337.31 for Flytech and NT$

373.02 for Advantech. The actual price of Flytech is NT$ 128,

whereas Advantech is NT$ 215. Our chosen valuation method is resulting

higher price than the actual value. However, we expect both of those companies

will reach high price in the future. IoT industry is expected to continue growing in

the future.