Stock Analysis

Estimating The Fair Value Of Globee Inc. (TSE:5575)

TSE:5575
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Key Insights

  • The projected fair value for Globee is JP¥1,264 based on 2 Stage Free Cash Flow to Equity
  • Current share price of JP¥1,273 suggests Globee is potentially trading close to its fair value
  • Globee's peers seem to be trading at a higher premium to fair value based onthe industry average of -28%

How far off is Globee Inc. (TSE:5575) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by projecting its future cash flows and then discounting them 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.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. 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.

Check out our latest analysis for Globee

Step By Step Through The Calculation

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. In the first stage we need to estimate the cash flows to the business over the next ten years. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last 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 discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
Levered FCF (¥, Millions) JP¥282.4m JP¥291.6m JP¥298.4m JP¥303.4m JP¥307.1m JP¥309.9m JP¥312.0m JP¥313.7m JP¥315.0m JP¥316.1m
Growth Rate Estimate Source Est @ 4.59% Est @ 3.26% Est @ 2.33% Est @ 1.68% Est @ 1.22% Est @ 0.91% Est @ 0.68% Est @ 0.53% Est @ 0.42% Est @ 0.34%
Present Value (¥, Millions) Discounted @ 5.0% JP¥269 JP¥264 JP¥258 JP¥249 JP¥240 JP¥231 JP¥221 JP¥212 JP¥202 JP¥193

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = JP¥2.3b

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 0.2%. We discount the terminal cash flows to today's value at a cost of equity of 5.0%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = JP¥316m× (1 + 0.2%) ÷ (5.0%– 0.2%) = JP¥6.5b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= JP¥6.5b÷ ( 1 + 5.0%)10= JP¥4.0b

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¥6.3b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of JP¥1.3k, the company appears around fair value 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.

dcf
TSE:5575 Discounted Cash Flow March 7th 2024

Important Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 Globee 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 5.0%, which is based on a levered beta of 0.865. 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.

Next Steps:

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. 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 Globee, we've compiled three relevant factors you should assess:

  1. Risks: For example, we've discovered 2 warning signs for Globee (1 shouldn't be ignored!) that you should be aware of before investing here.
  2. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
  3. Other Top Analyst Picks: Interested to see what the analysts are thinking? Take a look at our interactive list of analysts' top stock picks to find out what they feel might have an attractive future outlook!

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.

Valuation is complex, but we're helping make it simple.

Find out whether Globee is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.