Are Investors Undervaluing Yoshinoya Holdings Co., Ltd. (TSE:9861) By 21%?

Key Insights

• Yoshinoya Holdings' estimated fair value is JP¥3,944 based on 2 Stage Free Cash Flow to Equity
• Yoshinoya Holdings is estimated to be 21% undervalued based on current share price of JP¥3,099
• Our fair value estimate is 108% higher than Yoshinoya Holdings' analyst price target of JP¥1,900

Today we will run through one way of estimating the intrinsic value of Yoshinoya Holdings Co., Ltd. (TSE:9861) by taking the forecast future cash flows of the company and discounting them back to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!

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. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

See our latest analysis for Yoshinoya Holdings

Is Yoshinoya Holdings 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. 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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) estimate

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (¥, Millions)	JP¥13.7b	JP¥14.1b	JP¥14.4b	JP¥14.7b	JP¥14.8b	JP¥15.0b	JP¥15.1b	JP¥15.2b	JP¥15.3b	JP¥15.3b
Growth Rate Estimate Source	Est @ 4.30%	Est @ 3.09%	Est @ 2.24%	Est @ 1.64%	Est @ 1.23%	Est @ 0.94%	Est @ 0.73%	Est @ 0.59%	Est @ 0.49%	Est @ 0.42%
Present Value (¥, Millions) Discounted @ 6.0%	JP¥12.9k	JP¥12.5k	JP¥12.1k	JP¥11.6k	JP¥11.1k	JP¥10.5k	JP¥10.0k	JP¥9.5k	JP¥9.0k	JP¥8.5k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = JP¥108b

The second stage is also known as Terminal Value, this is the business's cash flow after 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 0.3%. We discount the terminal cash flows to today's value at a cost of equity of 6.0%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = JP¥15b× (1 + 0.3%) ÷ (6.0%– 0.3%) = JP¥265b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= JP¥265b÷ ( 1 + 6.0%)¹⁰= JP¥147b

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¥255b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of JP¥3.1k, the company appears a touch undervalued at a 21% discount to where the stock price trades currently. 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

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 Yoshinoya 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 6.0%, which is based on a levered beta of 1.162. 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 Yoshinoya Holdings

Moving On:

Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. It's not possible to obtain a foolproof valuation with a DCF model. 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. Why is the intrinsic value higher than the current share price? For Yoshinoya Holdings, we've put together three pertinent items you should assess:

1. Risks: Every company has them, and we've spotted 2 warning signs for Yoshinoya Holdings (of which 1 is concerning!) you should know about.
2. Future Earnings: How does 9861'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 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!

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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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.