Is OBIC Business Consultants Co., Ltd. (TSE:4733) Worth JP¥8.5k Based On Its Intrinsic Value?

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, OBIC Business Consultants fair value estimate is JP¥6,334
• Current share price of JP¥8,533 suggests OBIC Business Consultants is potentially 35% overvalued
• Analyst price target for 4733 is JP¥10,193, which is 61% above our fair value estimate

Today we will run through one way of estimating the intrinsic value of OBIC Business Consultants Co., Ltd. (TSE:4733) by taking the expected future cash flows and discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

Trump has pledged to "unleash" American oil and gas and these 15 US stocks have developments that are poised to benefit.

Is OBIC Business Consultants Fairly Valued?

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To begin with, we have to get estimates of the next ten years of cash flows. 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, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) estimate

	2026	2027	2028	2029	2030	2031	2032	2033	2034	2035
Levered FCF (¥, Millions)	JP¥17.1b	JP¥24.9b	JP¥26.6b	JP¥27.7b	JP¥28.6b	JP¥29.3b	JP¥29.8b	JP¥30.3b	JP¥30.6b	JP¥31.0b
Growth Rate Estimate Source	Analyst x2	Analyst x3	Analyst x3	Est @ 4.28%	Est @ 3.17%	Est @ 2.40%	Est @ 1.86%	Est @ 1.48%	Est @ 1.22%	Est @ 1.03%
Present Value (¥, Millions) Discounted @ 6.5%	JP¥16.1k	JP¥22.0k	JP¥22.0k	JP¥21.6k	JP¥20.9k	JP¥20.1k	JP¥19.2k	JP¥18.3k	JP¥17.4k	JP¥16.5k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = JP¥194b

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. 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 6.5%.

Terminal Value (TV)= FCF₂₀₃₅ × (1 + g) ÷ (r – g) = JP¥31b× (1 + 0.6%) ÷ (6.5%– 0.6%) = JP¥529b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= JP¥529b÷ ( 1 + 6.5%)¹⁰= JP¥282b

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¥476b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of JP¥8.5k, the company appears potentially overvalued at the time of writing. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

Important Assumptions

We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 OBIC Business Consultants 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 6.5%, which is based on a levered beta of 1.122. 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.

See our latest analysis for OBIC Business Consultants

SWOT Analysis for OBIC Business Consultants

Looking Ahead:

Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. 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. Why is the intrinsic value lower than the current share price? For OBIC Business Consultants, there are three further elements you should further examine:

1. Financial Health: Does 4733 have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
2. Future Earnings: How does 4733'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.