Stock Analysis

Are Investors Undervaluing Kyowa Kirin Co., Ltd. (TSE:4151) By 35%?

TSE:4151
Source: Shutterstock

Key Insights

  • Using the 2 Stage Free Cash Flow to Equity, Kyowa Kirin fair value estimate is JP¥4,223
  • Current share price of JP¥2,748 suggests Kyowa Kirin is potentially 35% undervalued
  • Our fair value estimate is 38% higher than Kyowa Kirin's analyst price target of JP¥3,054

Does the June share price for Kyowa Kirin Co., Ltd. (TSE:4151) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by estimating the company's future cash flows and discounting them to their present value. One way to achieve this is by employing 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 would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. 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 Kyowa Kirin

What's The Estimated Valuation?

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 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.

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

2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
Levered FCF (¥, Millions) -JP¥28.2b JP¥58.1b JP¥69.9b JP¥75.2b JP¥89.7b JP¥98.4b JP¥105.0b JP¥110.1b JP¥113.9b JP¥116.7b
Growth Rate Estimate Source Analyst x3 Analyst x4 Analyst x4 Analyst x4 Analyst x4 Est @ 9.63% Est @ 6.80% Est @ 4.82% Est @ 3.44% Est @ 2.46%
Present Value (¥, Millions) Discounted @ 4.7% -JP¥27.0k JP¥53.0k JP¥60.9k JP¥62.6k JP¥71.3k JP¥74.6k JP¥76.1k JP¥76.2k JP¥75.3k JP¥73.7k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = JP¥597b

The second stage is also known as Terminal Value, this is the business's cash flow after 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 4.7%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = JP¥117b× (1 + 0.2%) ÷ (4.7%– 0.2%) = JP¥2.6t

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= JP¥2.6t÷ ( 1 + 4.7%)10= JP¥1.6t

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¥2.2t. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of JP¥2.7k, the company appears quite good value at a 35% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

dcf
TSE:4151 Discounted Cash Flow June 14th 2024

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 Kyowa Kirin 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 4.7%, which is based on a levered beta of 0.800. 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 Kyowa Kirin

Strength
  • Earnings growth over the past year exceeded the industry.
  • Currently debt free.
  • Dividends are covered by earnings and cash flows.
Weakness
  • Dividend is low compared to the top 25% of dividend payers in the Pharmaceuticals market.
Opportunity
  • Annual earnings are forecast to grow for the next 3 years.
  • Good value based on P/E ratio and estimated fair value.
Threat
  • Annual earnings are forecast to grow slower than the Japanese market.

Moving On:

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. 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 example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Why is the intrinsic value higher than the current share price? For Kyowa Kirin, we've put together three further items you should further research:

  1. Financial Health: Does 4151 have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
  2. Future Earnings: How does 4151'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.

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

Find out whether Kyowa Kirin 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.

View the Free Analysis

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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

Find out whether Kyowa Kirin 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.

View the Free Analysis

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com

About TSE:4151

Kyowa Kirin

Engages in the research, development, manufacturing, marketing, and import/export of pharmaceuticals for oncology, nephrology, central nervous system, and immunology therapeutic areas in Japan, the United States, rest of the Americas, Europe, Asia, and internationally.

Flawless balance sheet with solid track record and pays a dividend.