Calculating The Intrinsic Value Of TDSE Inc. (TSE:7046)

Key Insights

• TDSE's estimated fair value is JP¥1,505 based on 2 Stage Free Cash Flow to Equity
• TDSE's JP¥1,696 share price indicates it is trading at similar levels as its fair value estimate
• TDSE's peers seem to be trading at a higher premium to fair value based onthe industry average of -129%

Does the April share price for TDSE Inc. (TSE:7046) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by projecting its future cash flows and then discounting them to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

See our latest analysis for TDSE

The Method

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, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) forecast

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (¥, Millions)	JP¥174.9m	JP¥179.3m	JP¥182.6m	JP¥185.0m	JP¥186.8m	JP¥188.1m	JP¥189.2m	JP¥190.0m	JP¥190.7m	JP¥191.2m
Growth Rate Estimate Source	Est @ 3.53%	Est @ 2.52%	Est @ 1.81%	Est @ 1.32%	Est @ 0.97%	Est @ 0.73%	Est @ 0.56%	Est @ 0.44%	Est @ 0.35%	Est @ 0.30%
Present Value (¥, Millions) Discounted @ 6.1%	JP¥165	JP¥159	JP¥153	JP¥146	JP¥139	JP¥132	JP¥125	JP¥118	JP¥112	JP¥106

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = JP¥1.4b

The second stage is also known as Terminal Value, this is the business's cash flow after 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 0.2%. We discount the terminal cash flows to today's value at a cost of equity of 6.1%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = JP¥191m× (1 + 0.2%) ÷ (6.1%– 0.2%) = JP¥3.2b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= JP¥3.2b÷ ( 1 + 6.1%)¹⁰= JP¥1.8b

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¥3.1b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of JP¥1.7k, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

Important 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 TDSE 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 6.1%, which is based on a levered beta of 1.060. 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.

Looking Ahead:

Although the valuation of a company is important, it 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. 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. 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 TDSE, we've compiled three pertinent items you should look at:

1. Risks: Be aware that TDSE is showing 2 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...
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. 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.