Calculating The Fair Value Of Bizmates, Inc. (TSE:9345)

Key Insights

• The projected fair value for Bizmates is JP¥792 based on 2 Stage Free Cash Flow to Equity
• With JP¥722 share price, Bizmates appears to be trading close to its estimated fair value
• Industry average discount to fair value of 24% suggests Bizmates' peers are currently trading at a higher discount

How far off is Bizmates, Inc. (TSE:9345) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the forecast future cash flows of the company and discounting them back to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. 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 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. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

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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. In the first stage we need to estimate the cash flows to the business over the next ten years. 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

	2026	2027	2028	2029	2030	2031	2032	2033	2034	2035
Levered FCF (¥, Millions)	JP¥205.6m	JP¥166.3m	JP¥144.3m	JP¥131.2m	JP¥123.1m	JP¥118.0m	JP¥114.8m	JP¥112.9m	JP¥111.7m	JP¥111.1m
Growth Rate Estimate Source	Est @ -27.59%	Est @ -19.13%	Est @ -13.21%	Est @ -9.07%	Est @ -6.17%	Est @ -4.14%	Est @ -2.72%	Est @ -1.72%	Est @ -1.03%	Est @ -0.54%
Present Value (¥, Millions) Discounted @ 5.1%	JP¥196	JP¥151	JP¥124	JP¥108	JP¥96.1	JP¥87.6	JP¥81.1	JP¥75.9	JP¥71.4	JP¥67.6

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = JP¥1.1b

The second stage is also known as Terminal Value, this is the business's cash flow after 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 (0.6%) 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 5.1%.

Terminal Value (TV)= FCF₂₀₃₅ × (1 + g) ÷ (r – g) = JP¥111m× (1 + 0.6%) ÷ (5.1%– 0.6%) = JP¥2.5b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= JP¥2.5b÷ ( 1 + 5.1%)¹⁰= JP¥1.5b

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¥2.6b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of JP¥722, the company appears about fair value at a 8.8% 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.

Important 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 Bizmates 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 5.1%, which is based on a levered beta of 0.856. 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.

See our latest analysis for Bizmates

SWOT Analysis for Bizmates

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. 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. 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 Bizmates, there are three further elements you should look at:

1. Risks: For instance, we've identified 4 warning signs for Bizmates (1 can't be ignored) you should be aware of.
2. Future Earnings: How does 9345'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.