- Japan
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- Commercial Services
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- TSE:7911
An Intrinsic Calculation For TOPPAN Holdings Inc. (TSE:7911) Suggests It's 32% Undervalued
Key Insights
- The projected fair value for TOPPAN Holdings is JP¥5,302 based on 2 Stage Free Cash Flow to Equity
- Current share price of JP¥3,619 suggests TOPPAN Holdings is potentially 32% undervalued
- The JP¥4,073 analyst price target for 7911 is 23% less than our estimate of fair value
Today we'll do a simple run through of a valuation method used to estimate the attractiveness of TOPPAN Holdings Inc. (TSE:7911) as an investment opportunity by taking the forecast future cash flows of the company and discounting them back to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. Don't get put off by the jargon, the math behind it is actually quite straightforward.
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. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.
See our latest analysis for TOPPAN Holdings
What's The Estimated Valuation?
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, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) forecast
2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | |
Levered FCF (¥, Millions) | JP¥87.0b | JP¥73.8b | JP¥80.0b | JP¥84.2b | JP¥87.4b | JP¥89.7b | JP¥91.4b | JP¥92.7b | JP¥93.7b | JP¥94.4b |
Growth Rate Estimate Source | Analyst x1 | Analyst x2 | Analyst x2 | Est @ 5.29% | Est @ 3.75% | Est @ 2.67% | Est @ 1.92% | Est @ 1.39% | Est @ 1.02% | Est @ 0.76% |
Present Value (¥, Millions) Discounted @ 5.6% | JP¥82.4k | JP¥66.2k | JP¥68.0k | JP¥67.9k | JP¥66.7k | JP¥64.9k | JP¥62.6k | JP¥60.2k | JP¥57.6k | JP¥55.0k |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = JP¥651b
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. 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 (0.2%) 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 5.6%.
Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = JP¥94b× (1 + 0.2%) ÷ (5.6%– 0.2%) = JP¥1.8t
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= JP¥1.8t÷ ( 1 + 5.6%)10= JP¥1.0t
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¥1.7t. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of JP¥3.6k, the company appears quite undervalued at a 32% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.
Important 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 TOPPAN Holdings 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 0.958. 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 TOPPAN Holdings
- Debt is not viewed as a risk.
- Dividends are covered by earnings and cash flows.
- Earnings declined over the past year.
- Dividend is low compared to the top 25% of dividend payers in the Commercial Services market.
- Annual earnings are forecast to grow for the next 3 years.
- Good value based on P/E ratio and estimated fair value.
- Annual earnings are forecast to grow slower than the Japanese market.
Next Steps:
Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/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. What is the reason for the share price sitting below the intrinsic value? For TOPPAN Holdings, we've put together three further aspects you should explore:
- Risks: Take risks, for example - TOPPAN Holdings has 2 warning signs we think you should be aware of.
- Future Earnings: How does 7911'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. 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.
Valuation is complex, but we're here to simplify it.
Discover if TOPPAN Holdings might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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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:7911
TOPPAN Holdings
Develops solutions based on its printing technologies in Japan and internationally.
Flawless balance sheet and good value.