A Look At The Intrinsic Value Of ENEOS Holdings, Inc. (TSE:5020)

Key Insights

• ENEOS Holdings' estimated fair value is JP¥769 based on 2 Stage Free Cash Flow to Equity
• ENEOS Holdings' JP¥699 share price indicates it is trading at similar levels as its fair value estimate
• Our fair value estimate is 17% lower than ENEOS Holdings' analyst price target of JP¥924

In this article we are going to estimate the intrinsic value of ENEOS Holdings, Inc. (TSE:5020) by taking the expected future cash flows and discounting them to their present value. Our analysis will employ the Discounted Cash Flow (DCF) model. 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 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.

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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. To start off with, we need to estimate 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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, 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¥521.1b	JP¥244.3b	-JP¥12.4b	JP¥57.1b	JP¥156.0b	JP¥138.0b	JP¥127.0b	JP¥120.1b	JP¥115.7b	JP¥112.8b
Growth Rate Estimate Source	Analyst x4	Analyst x3	Analyst x4	Analyst x2	Analyst x1	Est @ -11.52%	Est @ -7.95%	Est @ -5.46%	Est @ -3.71%	Est @ -2.49%
Present Value (¥, Millions) Discounted @ 7.0%	JP¥486.9k	JP¥213.3k	-JP¥10.1k	JP¥43.5k	JP¥111.1k	JP¥91.9k	JP¥79.0k	JP¥69.8k	JP¥62.8k	JP¥57.2k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = JP¥1.2t

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 0.4%. We discount the terminal cash flows to today's value at a cost of equity of 7.0%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = JP¥113b× (1 + 0.4%) ÷ (7.0%– 0.4%) = JP¥1.7t

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= JP¥1.7t÷ ( 1 + 7.0%)¹⁰= JP¥864b

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¥2.1t. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of JP¥699, the company appears about fair value at a 9.1% 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

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 ENEOS 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 7.0%, which is based on a levered beta of 1.262. 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.

View our latest analysis for ENEOS Holdings

SWOT Analysis for ENEOS Holdings

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. 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. For ENEOS Holdings, there are three pertinent elements you should consider:

1. Risks: Every company has them, and we've spotted 1 warning sign for ENEOS Holdings you should know about.
2. Future Earnings: How does 5020'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.

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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.