Calculating The Intrinsic Value Of Ubiquitous AI Corporation (TSE:3858)

Key Insights

• The projected fair value for Ubiquitous AI is JP¥315 based on 2 Stage Free Cash Flow to Equity
• With JP¥327 share price, Ubiquitous AI appears to be trading close to its estimated fair value
• When compared to theindustry average discount of -39%, Ubiquitous AI's competitors seem to be trading at a greater premium to fair value

In this article we are going to estimate the intrinsic value of Ubiquitous AI Corporation (TSE:3858) by taking the expected future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. 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 Ubiquitous AI

What's The Estimated Valuation?

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To start off with, we need to estimate 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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) forecast

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (¥, Millions)	JP¥144.8m	JP¥153.2m	JP¥159.5m	JP¥164.3m	JP¥167.8m	JP¥170.5m	JP¥172.5m	JP¥174.1m	JP¥175.3m	JP¥176.3m
Growth Rate Estimate Source	Est @ 8.15%	Est @ 5.78%	Est @ 4.13%	Est @ 2.97%	Est @ 2.15%	Est @ 1.59%	Est @ 1.19%	Est @ 0.91%	Est @ 0.71%	Est @ 0.58%
Present Value (¥, Millions) Discounted @ 5.4%	JP¥137	JP¥138	JP¥136	JP¥133	JP¥129	JP¥124	JP¥120	JP¥114	JP¥109	JP¥104

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = JP¥1.2b

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 5.4%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = JP¥176m× (1 + 0.3%) ÷ (5.4%– 0.3%) = JP¥3.5b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= JP¥3.5b÷ ( 1 + 5.4%)¹⁰= JP¥2.0b

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¥3.3b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of JP¥327, 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.

The 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 Ubiquitous AI 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 5.4%, which is based on a levered beta of 1.028. 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 Ubiquitous AI

Next Steps:

Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. 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 instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Ubiquitous AI, we've compiled three additional aspects you should further research:

1. Risks: For example, we've discovered 3 warning signs for Ubiquitous AI (1 is a bit unpleasant!) that you should be aware of before investing here.
2. 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!
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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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.