- Japan
- /
- Communications
- /
- TSE:6835
A Look At The Intrinsic Value Of Allied Telesis Holdings K.K. (TSE:6835)
Key Insights
- Using the 2 Stage Free Cash Flow to Equity, Allied Telesis Holdings K.K fair value estimate is JP¥115
- With JP¥106 share price, Allied Telesis Holdings K.K appears to be trading close to its estimated fair value
- The average premium for Allied Telesis Holdings K.K's competitorsis currently 176%
In this article we are going to estimate the intrinsic value of Allied Telesis Holdings K.K. (TSE:6835) by taking the expected future cash flows and 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!
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
See our latest analysis for Allied Telesis Holdings K.K
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 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, 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¥1.68b | JP¥1.22b | JP¥979.9m | JP¥847.8m | JP¥768.5m | JP¥718.7m | JP¥686.7m | JP¥665.8m | JP¥652.2m | JP¥643.4m |
Growth Rate Estimate Source | Est @ -39.80% | Est @ -27.78% | Est @ -19.37% | Est @ -13.48% | Est @ -9.36% | Est @ -6.47% | Est @ -4.45% | Est @ -3.04% | Est @ -2.05% | Est @ -1.36% |
Present Value (¥, Millions) Discounted @ 6.3% | JP¥1.6k | JP¥1.1k | JP¥816 | JP¥664 | JP¥566 | JP¥498 | JP¥448 | JP¥409 | JP¥377 | JP¥349 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = JP¥6.8b
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 0.3%. We discount the terminal cash flows to today's value at a cost of equity of 6.3%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = JP¥643m× (1 + 0.3%) ÷ (6.3%– 0.3%) = JP¥11b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= JP¥11b÷ ( 1 + 6.3%)10= JP¥5.8b
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¥13b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of JP¥106, the company appears about fair value at a 7.9% 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.
The Assumptions
Now 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 Allied Telesis Holdings K.K 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 6.3%, which is based on a levered beta of 1.212. 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 Allied Telesis Holdings K.K
- Debt is not viewed as a risk.
- Earnings declined over the past year.
- Dividend is low compared to the top 25% of dividend payers in the Communications market.
- Current share price is below our estimate of fair value.
- Lack of analyst coverage makes it difficult to determine 6835's earnings prospects.
- No apparent threats visible for 6835.
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. 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 example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Allied Telesis Holdings K.K, we've put together three pertinent aspects you should further research:
- Risks: As an example, we've found 3 warning signs for Allied Telesis Holdings K.K (1 shouldn't be ignored!) that you need to consider before investing here.
- 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!
- 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.
New: Manage All Your Stock Portfolios in One Place
We've created the ultimate portfolio companion for stock investors, and it's free.
• Connect an unlimited number of Portfolios and see your total in one currency
• Be alerted to new Warning Signs or Risks via email or mobile
• Track the Fair Value of your stocks
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:6835
Allied Telesis Holdings K.K
A holding company, engages in the planning, development, manufacture, and sale of network devices and solutions worldwide.
Flawless balance sheet and fair value.