Stock Analysis
Is ASKUL Corporation (TSE:2678) Trading At A 33% Discount?
Key Insights
- Using the 2 Stage Free Cash Flow to Equity, ASKUL fair value estimate is JP¥3,156
- ASKUL is estimated to be 33% undervalued based on current share price of JP¥2,118
- The JP¥2,484 analyst price target for 2678 is 21% less than our estimate of fair value
Today we'll do a simple run through of a valuation method used to estimate the attractiveness of ASKUL Corporation (TSE:2678) as an investment opportunity by projecting its future cash flows and then discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. 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 ASKUL
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 start off with, we need to estimate 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.
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) forecast
2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | |
Levered FCF (¥, Millions) | JP¥10.6b | JP¥16.4b | JP¥14.0b | JP¥15.3b | JP¥16.5b | JP¥16.6b | JP¥16.7b | JP¥16.8b | JP¥16.8b | JP¥16.9b |
Growth Rate Estimate Source | Analyst x1 | Analyst x3 | Analyst x1 | Analyst x1 | Analyst x1 | Est @ 0.74% | Est @ 0.59% | Est @ 0.49% | Est @ 0.42% | Est @ 0.37% |
Present Value (¥, Millions) Discounted @ 5.5% | JP¥10.0k | JP¥14.7k | JP¥11.9k | JP¥12.4k | JP¥12.6k | JP¥12.0k | JP¥11.4k | JP¥10.9k | JP¥10.4k | JP¥9.9k |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = JP¥116b
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. 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 (0.3%) 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 5.5%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = JP¥17b× (1 + 0.3%) ÷ (5.5%– 0.3%) = JP¥320b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= JP¥320b÷ ( 1 + 5.5%)10= JP¥187b
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¥303b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of JP¥2.1k, the company appears quite undervalued at a 33% discount to where the stock price trades currently. 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.
The 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 ASKUL 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 5.5%, which is based on a levered beta of 1.062. 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 ASKUL
- Earnings growth over the past year exceeded the industry.
- Debt is not viewed as a risk.
- Dividends are covered by earnings and cash flows.
- Dividend is low compared to the top 25% of dividend payers in the Multiline Retail market.
- Annual revenue is forecast to grow faster than the Japanese market.
- Good value based on P/E ratio and estimated fair value.
- Annual earnings are forecast to decline for the next 3 years.
Next Steps:
Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Why is the intrinsic value higher than the current share price? For ASKUL, we've compiled three fundamental aspects you should assess:
- Risks: Every company has them, and we've spotted 2 warning signs for ASKUL you should know about.
- Future Earnings: How does 2678'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 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.
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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.
About TSE:2678
ASKUL
Provides office supplies mail-order services for small and medium sized offices in Japan.