Calculating The Fair Value Of DIGITALIFT Inc. (TSE:9244)

Key Insights

• The projected fair value for DIGITALIFT is JP¥1,124 based on 2 Stage Free Cash Flow to Equity
• DIGITALIFT's JP¥1,128 share price indicates it is trading at similar levels as its fair value estimate
• When compared to theindustry average discount of -5.6%, DIGITALIFT's competitors seem to be trading at a greater premium to fair value

In this article we are going to estimate the intrinsic value of DIGITALIFT Inc. (TSE:9244) 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. There's really not all that much to it, even though it might appear quite complex.

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

The Method

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. 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, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (¥, Millions)	JP¥85.5m	JP¥87.3m	JP¥88.7m	JP¥89.7m	JP¥90.4m	JP¥91.0m	JP¥91.5m	JP¥91.8m	JP¥92.1m	JP¥92.4m
Growth Rate Estimate Source	Est @ 3.00%	Est @ 2.15%	Est @ 1.55%	Est @ 1.13%	Est @ 0.84%	Est @ 0.64%	Est @ 0.49%	Est @ 0.39%	Est @ 0.32%	Est @ 0.27%
Present Value (¥, Millions) Discounted @ 5.8%	JP¥80.8	JP¥78.0	JP¥74.9	JP¥71.5	JP¥68.2	JP¥64.8	JP¥61.6	JP¥58.4	JP¥55.4	JP¥52.5

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = JP¥666m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 5.8%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = JP¥92m× (1 + 0.2%) ÷ (5.8%– 0.2%) = JP¥1.6b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= JP¥1.6b÷ ( 1 + 5.8%)¹⁰= JP¥930m

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¥1.6b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of JP¥1.1k, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

The 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 DIGITALIFT 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 5.8%, which is based on a levered beta of 1.004. 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 DIGITALIFT

Next Steps:

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. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For DIGITALIFT, we've compiled three pertinent elements you should explore:

1. Risks: Case in point, we've spotted 3 warning signs for DIGITALIFT you should be aware of, and 1 of them is concerning.
2. Future Earnings: How does 9244'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. 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.