# Calculating The Intrinsic Value Of JustSystems Corporation (TSE:4686)

Simply Wall St · 08/31 23:19

### Key Insights

• The projected fair value for JustSystems is JP¥4,264 based on 2 Stage Free Cash Flow to Equity
• JustSystems' JP¥3,465 share price indicates it is trading at similar levels as its fair value estimate

In this article we are going to estimate the intrinsic value of JustSystems Corporation (TSE:4686) by taking the expected future cash flows and discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

Check out our latest analysis for JustSystems

## The Method

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.

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¥11.6b JP¥12.3b JP¥12.8b JP¥13.2b JP¥13.5b JP¥13.7b JP¥13.9b JP¥14.0b JP¥14.1b JP¥14.2b Growth Rate Estimate Source Est @ 8.18% Est @ 5.80% Est @ 4.14% Est @ 2.98% Est @ 2.16% Est @ 1.59% Est @ 1.19% Est @ 0.91% Est @ 0.72% Est @ 0.58% Present Value (¥, Millions) Discounted @ 5.2% JP¥11.1k JP¥11.1k JP¥11.0k JP¥10.8k JP¥10.5k JP¥10.1k JP¥9.7k JP¥9.3k JP¥8.9k JP¥8.5k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = JP¥101b

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 5.2%.

Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = JP¥14b× (1 + 0.3%) ÷ (5.2%– 0.3%) = JP¥287b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= JP¥287b÷ ( 1 + 5.2%)10= JP¥173b

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¥274b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of JP¥3.5k, the company appears about fair value at a 19% 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

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 JustSystems 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 5.2%, which is based on a levered beta of 0.995. 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 JustSystems

Strength
• Currently debt free.
Weakness
• Earnings declined over the past year.
• Dividend is low compared to the top 25% of dividend payers in the Software market.
Opportunity
• Current share price is below our estimate of fair value.
• Lack of analyst coverage makes it difficult to determine 4686's earnings prospects.
Threat
• No apparent threats visible for 4686.

## Moving On:

Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For JustSystems, there are three relevant factors you should explore:

1. Financial Health: Does 4686 have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
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.