Abu Dhabi National Oil Company Embedded Value Estimation for PJSC Distribution (ADX:ADNOCDIST)
Today, we’ll walk through one way to estimate the intrinsic value of Abu Dhabi National Oil Company for Distribution PJSC (ADX:ADNOCDIST) by projecting its future cash flows and then discounting them to present value. One way to do this is to use the discounted cash flow (DCF) model. Believe it or not, it’s not too hard to follow, as you’ll see in our example!
Businesses can be valued in many ways, which is why we emphasize that a DCF is not perfect for all situations. Anyone interested in learning a little more about intrinsic value should read the Simply Wall St.
See our latest analysis for Abu Dhabi National Oil Company for Distribution PJSC
The calculation
We will use a two-stage DCF model which, as the name suggests, takes into account two stages of growth. The first stage is usually a period of higher growth which stabilizes towards the terminal value, captured in the second period of “sustained growth”. In the first step, we need to estimate the company’s cash flow over the next ten years. Wherever possible, we use analysts’ estimates, but where these are not available, we extrapolate the previous free cash flow (FCF) from the latest estimate or reported value. We assume that companies with decreasing free cash flow will slow their rate of contraction and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow more in early years than in later years.
Generally, we assume that a dollar today is worth more than a dollar in the future, and so the sum of these future cash flows is then discounted to today’s value:
Estimated free cash flow (FCF) over 10 years
2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | |
Leveraged FCF (AED, Millions) | Ï.å1.82b | Ï.å2.60b | Ï.å2.84b | Ï.å3.13b | Ï.å3.42b | Ï.å3.71b | Ï.å4.03b | Ï.å4.38b | د.إ4.77b | Ï.å5.19b |
Growth rate estimate Source | Analyst x3 | Analyst x3 | Analyst x1 | Analyst x1 | Analyst x1 | Is at 8.45% | Is at 8.6% | Is at 8.71% | Is at 8.79% | Is at 8.84% |
Present value (AED, millions) discounted at 14% | د.إ1.6k | د.إ2.0k | د.إ1.9k | د.إ1.8k | د.إ1.8k | د.إ1.7k | د.إ1.6k | د.إ1.5k | د.إ1.4k | د.إ1.4k |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = Ï.å17b
We now need to calculate the terminal value, which represents all future cash flows after this ten-year period. The Gordon Growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average 10-year government bond yield of 9.0%. We discount the terminal cash flows to their present value at a cost of equity of 14%.
Terminal value (TV)= FCF_{2031} × (1 + g) ÷ (r – g) = Ï.å5.2b× (1 + 9.0%) ÷ (14%– 9.0%) = ï.å105b
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= Ï.å105b÷ ( 1 + 14%)^{ten}= Ï.å27b
The total value, or equity value, is then the sum of the present value of future cash flows, which in this case is د.إ44b. The final step is to divide the equity value by the number of shares outstanding. Compared to the current share price of د.إ4.1, the company appears around fair value at the time of writing. Ratings are imprecise instruments, however, much like a telescope – move a few degrees and end up in another galaxy. Keep that in mind.
The hypotheses
The above calculation is highly dependent on two assumptions. One is the discount rate and the other is the cash flows. Part of investing is coming up with your own assessment of a company’s future performance, so try the math yourself and check your own assumptions. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we are considering Abu Dhabi National Oil Company for Distribution PJSC 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 14%, which is based on a leveraged beta of 1.141. Beta is a measure of a stock’s volatility relative to the market as a whole. We derive our beta from the average industry beta of broadly comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
Next steps:
While valuing a business is important, it ideally won’t be the only piece of analysis you look at for a business. The DCF model is not a perfect stock valuation tool. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under/overvalued?” For example, if the terminal value growth rate is adjusted slightly, it can significantly change the overall result. For Abu Dhabi National Oil Company for Distribution PJSC, we have compiled three additional things you should explore:
- Risks: Be aware that Abu Dhabi National Oil Company for Distribution PJSC shows 2 warning signs in our investment analysis and 1 of them is a little worrying…
- Future earnings: How does ADNOCDIST’s growth rate compare to its peers and the broader market? Dive deeper into the analyst consensus figure for the coming years by interacting with our free analyst growth forecast chart.
- Other strong companies: Low debt, high returns on equity and good past performance are essential to a strong business. Why not explore our interactive list of stocks with strong trading fundamentals to see if there are any other companies you may not have considered!
PS. Simply Wall St updates its DCF calculation for every UAE stock daily, so if you want to find the intrinsic value of any other stock, just search here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.