Estimating The Fair Value Of Asahi Intecc Co., Ltd. (TSE:7747)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Asahi Intecc fair value estimate is JP¥2,615
• Asahi Intecc's JP¥2,949 share price indicates it is trading at similar levels as its fair value estimate
• The JP¥3,383 analyst price target for 7747 is 29% more than our estimate of fair value

In this article we are going to estimate the intrinsic value of Asahi Intecc Co., Ltd. (TSE:7747) 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 want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

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The Method

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. 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.

Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

	2026	2027	2028	2029	2030	2031	2032	2033	2034	2035
Levered FCF (¥, Millions)	JP¥24.5b	JP¥25.0b	JP¥27.9b	JP¥30.4b	JP¥33.2b	JP¥35.2b	JP¥36.7b	JP¥37.8b	JP¥38.8b	JP¥39.5b
Growth Rate Estimate Source	Analyst x2	Analyst x5	Analyst x5	Analyst x3	Analyst x3	Est @ 5.85%	Est @ 4.27%	Est @ 3.17%	Est @ 2.40%	Est @ 1.86%
Present Value (¥, Millions) Discounted @ 5.6%	JP¥23.2k	JP¥22.4k	JP¥23.7k	JP¥24.4k	JP¥25.2k	JP¥25.3k	JP¥25.0k	JP¥24.4k	JP¥23.6k	JP¥22.8k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = JP¥240b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 0.6%. We discount the terminal cash flows to today's value at a cost of equity of 5.6%.

Terminal Value (TV)= FCF₂₀₃₅ × (1 + g) ÷ (r – g) = JP¥39b× (1 + 0.6%) ÷ (5.6%– 0.6%) = JP¥786b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= JP¥786b÷ ( 1 + 5.6%)¹⁰= JP¥454b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is JP¥694b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of JP¥2.9k, the company appears around fair value at the time of writing. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Asahi Intecc 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 5.6%, which is based on a levered beta of 0.962. 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.

View our latest analysis for Asahi Intecc

SWOT Analysis for Asahi Intecc

Moving On:

Although the valuation of a company is important, it shouldn't be the only metric you look at when researching 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. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For Asahi Intecc, we've compiled three fundamental elements you should look at:

1. Risks: For example, we've discovered 1 warning sign for Asahi Intecc that you should be aware of before investing here.
2. Future Earnings: How does 7747'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 High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St updates its DCF calculation for every Japanese stock every day, so if you want to find the intrinsic value of any other stock just search here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.