Estimating The Intrinsic Value Of GLOME Holdings,Inc. (TSE:8938)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, GLOME HoldingsInc fair value estimate is JP¥604
• Current share price of JP¥656 suggests GLOME HoldingsInc is potentially trading close to its fair value
• Industry average of 206% suggests GLOME HoldingsInc's peers are currently trading at a higher premium to fair value

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of GLOME Holdings,Inc. (TSE:8938) as an investment opportunity by projecting its future cash flows and then discounting them to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Believe it or not, it's not too difficult to follow, as you'll see from our example!

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. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

Check out our latest analysis for GLOME HoldingsInc

Step By Step Through The Calculation

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To begin with, we have to get estimates of 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, 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¥302.9m	JP¥309.5m	JP¥314.4m	JP¥318.1m	JP¥320.9m	JP¥323.1m	JP¥324.8m	JP¥326.2m	JP¥327.4m	JP¥328.4m
Growth Rate Estimate Source	Est @ 3.04%	Est @ 2.19%	Est @ 1.59%	Est @ 1.17%	Est @ 0.88%	Est @ 0.68%	Est @ 0.53%	Est @ 0.43%	Est @ 0.36%	Est @ 0.31%
Present Value (¥, Millions) Discounted @ 6.0%	JP¥286	JP¥275	JP¥264	JP¥252	JP¥239	JP¥227	JP¥215	JP¥204	JP¥193	JP¥183

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = JP¥2.3b

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 0.2%. We discount the terminal cash flows to today's value at a cost of equity of 6.0%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = JP¥328m× (1 + 0.2%) ÷ (6.0%– 0.2%) = JP¥5.6b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= JP¥5.6b÷ ( 1 + 6.0%)¹⁰= JP¥3.1b

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¥5.5b. 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¥656, the company appears around fair value at the time of writing. 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

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. 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 GLOME HoldingsInc 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 6.0%, which is based on a levered beta of 1.038. 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 GLOME HoldingsInc

Looking Ahead:

Whilst important, the DCF calculation 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. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For GLOME HoldingsInc, we've compiled three further aspects you should assess:

1. Risks: Case in point, we've spotted 1 warning sign for GLOME HoldingsInc 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 Top Analyst Picks: Interested to see what the analysts are thinking? Take a look at our interactive list of analysts' top stock picks to find out what they feel might have an attractive future outlook!

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.