Stock Analysis
- Japan
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- Commercial Services
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- TSE:6544
Calculating The Fair Value Of Japan Elevator Service Holdings Co.,Ltd. (TSE:6544)
Key Insights
- Japan Elevator Service HoldingsLtd's estimated fair value is JP¥2,606 based on 2 Stage Free Cash Flow to Equity
- Current share price of JP¥2,557 suggests Japan Elevator Service HoldingsLtd is potentially trading close to its fair value
- Analyst price target for 6544 is JP¥3,300, which is 27% above our fair value estimate
In this article we are going to estimate the intrinsic value of Japan Elevator Service Holdings Co.,Ltd. (TSE:6544) by taking the expected future cash flows and discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!
We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
Check out our latest analysis for Japan Elevator Service HoldingsLtd
Crunching The Numbers
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) forecast
2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | |
Levered FCF (¥, Millions) | JP¥5.21b | JP¥6.48b | JP¥8.11b | JP¥8.11b | JP¥9.46b | JP¥10.2b | JP¥10.8b | JP¥11.2b | JP¥11.5b | JP¥11.8b |
Growth Rate Estimate Source | Analyst x4 | Analyst x4 | Analyst x4 | Analyst x1 | Analyst x1 | Est @ 7.85% | Est @ 5.57% | Est @ 3.98% | Est @ 2.86% | Est @ 2.08% |
Present Value (¥, Millions) Discounted @ 4.8% | JP¥5.0k | JP¥5.9k | JP¥7.0k | JP¥6.7k | JP¥7.5k | JP¥7.7k | JP¥7.8k | JP¥7.7k | JP¥7.5k | JP¥7.4k |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = JP¥70b
The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (0.3%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 4.8%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = JP¥12b× (1 + 0.3%) ÷ (4.8%– 0.3%) = JP¥259b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= JP¥259b÷ ( 1 + 4.8%)10= JP¥162b
The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is JP¥232b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of JP¥2.6k, the company appears about fair value at a 1.9% discount to where the stock price trades currently. 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
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. 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 Japan Elevator Service HoldingsLtd 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 4.8%, which is based on a levered beta of 0.914. 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.
SWOT Analysis for Japan Elevator Service HoldingsLtd
- Earnings growth over the past year exceeded the industry.
- Debt is not viewed as a risk.
- Dividend is low compared to the top 25% of dividend payers in the Commercial Services market.
- Annual earnings are forecast to grow faster than the Japanese market.
- Current share price is below our estimate of fair value.
- Revenue is forecast to grow slower than 20% per year.
Looking Ahead:
Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Japan Elevator Service HoldingsLtd, we've compiled three relevant factors you should further research:
- Financial Health: Does 6544 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.
- Future Earnings: How does 6544'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.
- 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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the TSE every day. If you want to find the calculation for other stocks just search here.
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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.
About TSE:6544
Japan Elevator Service HoldingsLtd
Provides repair, maintenance, and modernization services for elevators and escalators in Japan.