Is Mitsui O.S.K. Lines, Ltd. (TSE:9104) Worth JP¥4.9k Based On Its Intrinsic Value?

Simply Wall St · 10/14 21:25

Key Insights

  • The projected fair value for Mitsui O.S.K. Lines is JP¥3,630 based on Dividend Discount Model
  • Mitsui O.S.K. Lines is estimated to be 34% overvalued based on current share price of JP¥4,854
  • Analyst price target for 9104 is JP¥5,490, which is 51% above our fair value estimate

Does the October share price for Mitsui O.S.K. Lines, Ltd. (TSE:9104) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the forecast future cash flows of the company and discounting them back to today's value. This will be done using the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!

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 Mitsui O.S.K. Lines

The Method

We have to calculate the value of Mitsui O.S.K. Lines slightly differently to other stocks because it is a shipping company. In this approach dividends per share (DPS) are used, as free cash flow is difficult to estimate and often not reported by analysts. Unless a company pays out the majority of its FCF as a dividend, this method will typically underestimate the value of the stock. We use the Gordon Growth Model, which assumes dividend will grow into perpetuity at a rate that can be sustained. The dividend is expected to grow at an annual growth rate equal to the 5-year average of the 10-year government bond yield of 0.3%. We then discount this figure to today's value at a cost of equity of 6.4%. Compared to the current share price of JP¥4.9k, the company appears potentially overvalued at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

Value Per Share = Expected Dividend Per Share / (Discount Rate - Perpetual Growth Rate)

= JP¥224 / (6.4% – 0.3%)

= JP¥3.6k

dcf
TSE:9104 Discounted Cash Flow October 14th 2024

Important Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 Mitsui O.S.K. Lines 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 6.4%, which is based on a levered beta of 1.239. 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 Mitsui O.S.K. Lines

Strength
  • Debt is well covered by earnings and cashflows.
  • Dividend is in the top 25% of dividend payers in the market.
Weakness
  • Earnings declined over the past year.
Opportunity
  • Good value based on P/E ratio compared to estimated Fair P/E ratio.
Threat
  • Paying a dividend but company has no free cash flows.
  • Annual earnings are forecast to decline for the next 3 years.

Moving On:

Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. 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. What is the reason for the share price exceeding the intrinsic value? For Mitsui O.S.K. Lines, there are three further elements you should look at:

  1. Risks: We feel that you should assess the 4 warning signs for Mitsui O.S.K. Lines (1 is potentially serious!) we've flagged before making an investment in the company.
  2. Future Earnings: How does 9104'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 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!

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.