Stock Analysis

A Look At The Intrinsic Value Of Urbanet Corporation Co.,Ltd. (TSE:3242)

TSE:3242
Source: Shutterstock

Key Insights

  • Using the Dividend Discount Model, Urbanet CorporationLtd fair value estimate is JP¥299
  • Current share price of JP¥318 suggests Urbanet CorporationLtd is potentially trading close to its fair value
  • Urbanet CorporationLtd's peers seem to be trading at a higher premium to fair value based onthe industry average of -129%

In this article we are going to estimate the intrinsic value of Urbanet Corporation Co.,Ltd. (TSE:3242) 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. It may sound complicated, but actually it is quite simple!

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.

View our latest analysis for Urbanet CorporationLtd

The Method

As Urbanet CorporationLtd operates in the real estate sector, we need to calculate the intrinsic value slightly differently. In this approach dividends per share (DPS) are used, as free cash flow is difficult to estimate and often not reported by analysts. This often underestimates the value of a stock, but it can still be good as a comparison to competitors. We use the Gordon Growth Model, which assumes dividend will grow into perpetuity at a rate that can be sustained. The dividend is expected to grow at an annual growth rate equal to the 5-year average of the 10-year government bond yield of 0.3%. We then discount this figure to today's value at a cost of equity of 6.9%. Compared to the current share price of JP¥318, the company appears around fair value at the time of writing. 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.

Value Per Share = Expected Dividend Per Share / (Discount Rate - Perpetual Growth Rate)

= JP¥20.0 / (6.9% – 0.3%)

= JP¥299

dcf
TSE:3242 Discounted Cash Flow August 6th 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. 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 Urbanet CorporationLtd 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 6.9%, which is based on a levered beta of 1.342. 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 Urbanet CorporationLtd

Strength
  • Earnings growth over the past year exceeded the industry.
  • Debt is well covered by earnings.
  • Dividends are covered by earnings and cash flows.
  • Dividend is in the top 25% of dividend payers in the market.
Weakness
  • Current share price is above our estimate of fair value.
  • Shareholders have been diluted in the past year.
Opportunity
  • 3242's financial characteristics indicate limited near-term opportunities for shareholders.
  • Lack of analyst coverage makes it difficult to determine 3242's earnings prospects.
Threat
  • Debt is not well covered by operating cash flow.

Next Steps:

Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. It's not possible to obtain a foolproof valuation with a DCF model. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" 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 Urbanet CorporationLtd, we've compiled three relevant elements you should further research:

  1. Risks: For instance, we've identified 4 warning signs for Urbanet CorporationLtd (1 is significant) you should be aware of.
  2. 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!
  3. Other Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!

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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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.