Is There An Opportunity With Timee, Inc.'s (TSE:215A) 35% Undervaluation?

Key Insights

• Timee's estimated fair value is JP¥2,223 based on 2 Stage Free Cash Flow to Equity
• Timee's JP¥1,443 share price signals that it might be 35% undervalued
• Analyst price target for 215A is JP¥1,663 which is 25% below our fair value estimate

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Timee, Inc. (TSE:215A) as an investment opportunity by projecting its future cash flows and then discounting them to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. There's really not all that much to it, even though it might appear quite complex.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. 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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What's The Estimated Valuation?

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 begin with, we have to get estimates of 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) estimate

	2026	2027	2028	2029	2030	2031	2032	2033	2034	2035
Levered FCF (¥, Millions)	JP¥3.49b	JP¥4.97b	JP¥6.45b	JP¥7.80b	JP¥8.96b	JP¥9.91b	JP¥10.7b	JP¥11.2b	JP¥11.7b	JP¥12.0b
Growth Rate Estimate Source	Est @ 60.05%	Est @ 42.21%	Est @ 29.73%	Est @ 20.99%	Est @ 14.87%	Est @ 10.59%	Est @ 7.59%	Est @ 5.50%	Est @ 4.03%	Est @ 3.00%
Present Value (¥, Millions) Discounted @ 5.2%	JP¥3.3k	JP¥4.5k	JP¥5.5k	JP¥6.4k	JP¥7.0k	JP¥7.3k	JP¥7.5k	JP¥7.5k	JP¥7.4k	JP¥7.3k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = JP¥64b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 0.6%. We discount the terminal cash flows to today's value at a cost of equity of 5.2%.

Terminal Value (TV)= FCF₂₀₃₅ × (1 + g) ÷ (r – g) = JP¥12b× (1 + 0.6%) ÷ (5.2%– 0.6%) = JP¥264b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= JP¥264b÷ ( 1 + 5.2%)¹⁰= JP¥159b

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¥223b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of JP¥1.4k, the company appears quite good value at a 35% 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

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Timee 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 0.874. 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 Timee

SWOT Analysis for Timee

Next Steps:

Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize for a company. It's not possible to obtain a foolproof valuation with a DCF model. 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. Can we work out why the company is trading at a discount to intrinsic value? For Timee, we've compiled three relevant items you should assess:

1. Risks: For instance, we've identified 2 warning signs for Timee (1 shouldn't be ignored) you should be aware of.
2. Future Earnings: How does 215A'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. 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.

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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.