<div id="readability-page-1"><div><h3>Key Insights</h3><ul><li> The projected fair value for IHI is JP¥2,244 based on 2 Stage Free Cash Flow to Equity </li> <li> IHI's JP¥2,755 share price signals that it might be 23% overvalued </li> <li> Our fair value estimate is 30% lower than IHI's analyst price target of JP¥3,210 </li> </ul><p>Today we'll do a simple run through of a valuation method used to estimate the attractiveness of IHI Corporation (TSE:7013) as an investment opportunity  by estimating the company's future cash flows and discounting them to their present value.  One way to achieve this is by employing the Discounted Cash Flow (DCF) model.  Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.</p><p> Remember though, that there are many ways to estimate a company's value, and a DCF is just one method.  If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model. </p><p>This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.</p><h2> Step By Step Through The Calculation </h2> <p> 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.   Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or 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.  </p><p> 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: </p><h4> 10-year free cash flow (FCF) forecast </h4><table><tbody><tr><td> </td><td><strong>2026</strong></td><td><strong>2027</strong></td><td><strong>2028</strong></td><td><strong>2029</strong></td><td><strong>2030</strong></td><td><strong>2031</strong></td><td><strong>2032</strong></td><td><strong>2033</strong></td><td><strong>2034</strong></td><td><strong>2035</strong></td></tr><tr><td><strong> Levered FCF (¥, Millions) </strong></td><td>JP¥32.4b</td><td>JP¥75.6b</td><td>JP¥90.2b</td><td>JP¥126.8b</td><td>JP¥143.5b</td><td>JP¥155.2b</td><td>JP¥164.3b</td><td>JP¥171.4b</td><td>JP¥176.9b</td><td>JP¥181.2b</td></tr><tr><td><strong>Growth Rate Estimate Source</strong></td><td>Analyst x7</td><td>Analyst x7</td><td>Analyst x7</td><td>Analyst x2</td><td>Analyst x2</td><td>Est @ 8.16%</td><td>Est @ 5.89%</td><td>Est @ 4.30%</td><td>Est @ 3.19%</td><td>Est @ 2.41%</td></tr><tr><td><strong> Present Value (¥, Millions) Discounted @ 6.8% </strong></td><td>JP¥30.3k</td><td>JP¥66.2k</td><td>JP¥74.0k</td><td>JP¥97.3k</td><td>JP¥103.1k</td><td>JP¥104.4k</td><td>JP¥103.4k</td><td>JP¥101.0k</td><td>JP¥97.5k</td><td>JP¥93.5k</td></tr></tbody></table><p><i>(&#34;Est&#34; = FCF growth rate estimated by Simply Wall St)</i><br/><strong>Present Value of 10-year Cash Flow (PVCF)</strong> = JP¥871b</p><p> 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 6.8%. </p><p><strong>Terminal Value (TV)</strong>= FCF<sub>2035</sub> × (1 + g) ÷ (r – g) = JP¥181b× (1 + 0.6%) ÷ (6.8%– 0.6%) = JP¥2.9t</p><p><strong>Present Value of Terminal Value (PVTV)</strong>= TV / (1 + r)<sup>10</sup>= JP¥2.9t÷ ( 1 + 6.8%)<sup>10</sup>= JP¥1.5t</p><p> 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¥2.4t.  In the final step we divide the equity value by the number of shares outstanding.  Relative to the current share price of JP¥2.8k, the company appears   slightly overvalued    at the time of writing.   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. </p><figure><img height="760" src="https://imageproxy.pbkrs.com/https://images.simplywall.st/asset/chart/874396-dcf-1-dark-2/1767584769404?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" width="1706" original-src="https://imageproxy.pbkrs.com/https://images.simplywall.st/asset/chart/874396-dcf-1-dark-2/1767584769404"/><figcaption>TSE:7013 Discounted Cash Flow January 5th 2026</figcaption></figure> <h2> The Assumptions </h2><p> 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.  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 IHI 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 6.8%, which is based on a levered beta of 1.188. 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. </p> <p><span> View our latest analysis for IHI </span></p><h3>SWOT Analysis for IHI</h3><div><div><p><strong>Strength</strong></p><ul><li>Earnings growth over the past year exceeded the industry.</li></ul> <ul><li>Debt is well covered by earnings and cashflows.</li></ul> <ul>Balance sheet summary for 7013.</ul> </div><div><p><strong>Weakness</strong></p><ul><li>Dividend is low compared to the top 25% of dividend payers in the Machinery market.</li></ul></div><div><p><strong>Opportunity</strong></p><ul><li>Annual revenue is forecast to grow faster than the Japanese market.</li></ul> <ul><li>Good value based on P/E ratio compared to estimated Fair P/E ratio.</li></ul> </div><div><p><strong>Threat</strong></p><ul><li> Annual earnings are forecast to grow slower than the Japanese market.</li></ul> <ul> What else are analysts forecasting for 7013?</ul> </div></div><h2> Looking Ahead: </h2><p> 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.  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.   Can we work out why the company is trading at a premium to intrinsic value?   For IHI, there are three  pertinent  items  you should further research: </p><ol> <li> <strong>Risks</strong>: Be aware that  IHI is showing <strong> 2 warning signs in our investment analysis</strong> , you should know about...  </li> <li><strong>Future Earnings</strong>: How does 7013'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.</li><li> <strong>Other High Quality Alternatives</strong>: 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! </li> </ol><p> 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.</p><div><p>The New Payments ETF Is Live on NASDAQ:</p><p>Money is moving to real-time rails, and a newly listed ETF now gives investors direct exposure. Fast settlement. Institutional custody. Simple access.</p><p>Explore how this launch could reshape portfolios</p><p><span>Sponsored Content</span></p></div></div></div>

7013

<p>IHI Corporation (TSE:7013) is currently assessed to be 23% overvalued, with a projected fair value of JP¥2,244 compared to its share price of JP¥2,755. The valuation was derived using a two-stage Discounted Cash Flow (DCF) model, estimating future cash flows and discounting them to present value. The total equity value is calculated at JP¥2.4 trillion, indicating a slight overvaluation relative to the current share price. Investors are advised to consider various valuation methods and assumptions when evaluating the company's future performance.</p>

Is IHI Corporation (TSE:7013) Expensive For A Reason? A Look At Its Intrinsic Value