Key Insights
- Using the 2 Stage Free Cash Flow to Equity, PeptiDream fair value estimate is JP¥4,230
- PeptiDream is estimated to be 39% undervalued based on current share price of JP¥2,570
- Our fair value estimate is 23% higher than PeptiDream's analyst price target of JP¥3,443
Does the December share price for PeptiDream Inc. (TSE:4587) reflect what it's really worth? Today, we will estimate the stock's intrinsic value 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. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. 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 PeptiDream
Is PeptiDream Fairly Valued?
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. In the first stage we need to estimate the cash flows to the business over the next ten years. 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) forecast
2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | |
Levered FCF (¥, Millions) | JP¥12.7b | JP¥14.4b | JP¥17.0b | JP¥19.9b | JP¥21.9b | JP¥23.5b | JP¥24.7b | JP¥25.7b | JP¥26.3b | JP¥26.9b |
Growth Rate Estimate Source | Analyst x5 | Analyst x5 | Analyst x3 | Analyst x3 | Est @ 10.25% | Est @ 7.27% | Est @ 5.18% | Est @ 3.72% | Est @ 2.70% | Est @ 1.98% |
Present Value (¥, Millions) Discounted @ 4.7% | JP¥12.1k | JP¥13.1k | JP¥14.8k | JP¥16.5k | JP¥17.4k | JP¥17.8k | JP¥17.9k | JP¥17.8k | JP¥17.4k | JP¥17.0k |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = JP¥162b
After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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 4.7%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = JP¥27b× (1 + 0.3%) ÷ (4.7%– 0.3%) = JP¥612b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= JP¥612b÷ ( 1 + 4.7%)10= JP¥386b
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¥548b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of JP¥2.6k, the company appears quite undervalued at a 39% 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.
Important Assumptions
We would point out that 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 PeptiDream 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 0.884. 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 PeptiDream
- Earnings growth over the past year exceeded the industry.
- Debt is not viewed as a risk.
- No major weaknesses identified for 4587.
- Annual earnings are forecast to grow for the next 3 years.
- Trading below our estimate of fair value by more than 20%.
- Annual earnings are forecast to grow slower than the Japanese market.
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. 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. What is the reason for the share price sitting below the intrinsic value? For PeptiDream, we've put together three important aspects you should explore:
- Risks: As an example, we've found 1 warning sign for PeptiDream that you need to consider before investing here.
- Future Earnings: How does 4587'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.
- 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.
About TSE:4587
PeptiDream
A biopharmaceutical company, engages in the discovery and development of constrained peptides, small molecules, and peptide-drug conjugate therapeutics.
Outstanding track record with excellent balance sheet.