An Intrinsic Calculation For Konica Minolta, Inc. (TSE:4902) Suggests It's 48% Undervalued

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Konica Minolta fair value estimate is JP¥873
• Current share price of JP¥458 suggests Konica Minolta is potentially 48% undervalued
• Analyst price target for 4902 is JP¥498 which is 43% below our fair value estimate

Today we will run through one way of estimating the intrinsic value of Konica Minolta, Inc. (TSE:4902) by estimating the company's future cash flows and discounting them to their present value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

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.

View our latest analysis for Konica Minolta

The Model

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. 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, 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¥33.4b	JP¥69.0b	JP¥47.9b	JP¥34.3b	JP¥29.8b	JP¥51.6b	JP¥52.2b	JP¥52.7b	JP¥53.0b	JP¥53.3b
Growth Rate Estimate Source	Analyst x2	Analyst x1	Analyst x4	Analyst x2	Analyst x2	Analyst x1	Est @ 1.18%	Est @ 0.89%	Est @ 0.68%	Est @ 0.54%
Present Value (¥, Millions) Discounted @ 11%	JP¥30.0k	JP¥55.5k	JP¥34.6k	JP¥22.2k	JP¥17.4k	JP¥26.9k	JP¥24.4k	JP¥22.1k	JP¥20.0k	JP¥18.0k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = JP¥271b

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 11%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = JP¥53b× (1 + 0.2%) ÷ (11%– 0.2%) = JP¥474b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= JP¥474b÷ ( 1 + 11%)¹⁰= JP¥160b

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is JP¥432b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of JP¥458, the company appears quite undervalued at a 48% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

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 Konica Minolta 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 11%, which is based on a levered beta of 2.000. 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 Konica Minolta

Looking Ahead:

Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. 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. What is the reason for the share price sitting below the intrinsic value? For Konica Minolta, we've put together three pertinent items you should further examine:

1. Risks: Be aware that Konica Minolta is showing 1 warning sign in our investment analysis , you should know about...
2. Future Earnings: How does 4902'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.
3. 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. 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.