Calculating the fair value of Boutiques, Inc. (TSE:9272)

Key findings

• The estimated fair value of the boutiques is JP¥1,715 based on the 2-step free cash flow to equity
• With a share price of JP¥1,794, Boutiques appears to be trading close to its estimated fair value
• The average discount among boutique competitors is currently 12%

Today we’ll run through a valuation methodology to help us assess the attractiveness of Boutiques, Inc. (TSE:9272) as an investment opportunity. We do this by taking the expected future cash flows and discounting them to today’s value. This is done using the Discounted Cash Flow (DCF) model. Don’t be put off by the technical jargon, the math behind it is actually quite simple.

We generally believe that the value of a company is the present value of all the cash it will generate in the future. However, a DCF is just one valuation metric among many and is not without its flaws. For those who enjoy stock analysis, the Simply Wall St analysis model presented here might be of interest.

Check out our latest analysis for boutiques

What is the estimated value?

We use the two-stage growth model, which simply means that we consider two stages of the company’s growth. In the early stage, the company may have a higher growth rate, and in the second stage, a stable growth rate is usually assumed. First, we need to get estimates of the next ten years of cash flows. Since we don’t have analyst estimates of free cash flow available, we extrapolated the previous free cash flow (FCF) from the company’s last reported value. We assume that companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will slow their growth rate over this period. We do this to take into account that growth tends to slow down more in the early years than in later years.

In general, we assume that a dollar today is worth more than a dollar in the future. Therefore, we need to discount the sum of these future cash flows to arrive at an estimate of present value:

10-year free cash flow (FCF) forecast

(“Est” = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = 6.4 billion JPY

After calculating the present value of future cash flows in the first 10-year period, we need to calculate the terminal value that takes into account all future cash flows after the first period. The Gordon growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average of the 10-year Treasury yield of 0.2%. We discount the terminal cash flows to today’s value at a cost of equity of 5.2%.

Final value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = 864 m¥ × (1 + 0.2%) ÷ (5.2% – 0.2%) = 17 b¥

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= 17 billion JP¥ ÷ (1 + 5.2%)¹⁰= 10 billion JPY

Total value is the sum of the next ten years’ cash flows plus the discounted terminal value, which gives the total value of equity, which in this case is JP¥17 billion. 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¥1.8k, the company appears to be about its fair value at the time of writing. However, valuations are imprecise instruments, much like a telescope – move a few degrees and you end up in another galaxy. Keep this in mind.

The assumptions

The key inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you don’t agree with these results, try the calculation yourself and play with the assumptions. DCF also doesn’t take into account the potential cyclicality of an industry or a company’s future capital needs and therefore doesn’t provide a complete picture of a company’s potential performance. Since we consider boutiques 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 takes debt into account. In this calculation, we used 5.2%, which is based on a leveraged beta of 0.890. Beta is a measure of a stock’s volatility relative to the overall market. We get our beta from the industry average beta of globally comparable companies, with a set limit between 0.8 and 2.0, which is a reasonable range for a stable company.

Looking ahead:

Although the DCF calculation is important, ideally it should not be the only analysis you look at for a company. The DCF model is not a perfect tool for stock valuation. Rather, you should apply different cases and assumptions and see how they affect the valuation of the company. If a company grows differently or its cost of equity or risk-free rate changes significantly, the result may look very different. For boutiques, there are three relevant aspects to consider:

1. Risks: For example, we discovered 2 Warning signs for boutiques (1 cannot be ignored!) that you should know before investing here.
2. Other solid companies: Low debt, high returns on equity, and good past performance are the foundation of a strong company. Check out our interactive list of stocks with solid business fundamentals to see if there are any other companies you may not have considered!
3. Other environmentally friendly companies: Are you concerned about the environment and believe that consumers will increasingly buy environmentally friendly products? Browse through our interactive list of companies thinking about a greener future and discover some stocks you may not have thought of yet!

PS The Simply Wall St app runs 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 Simply Wall St article is of a general nature. We comment solely on historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.

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