How far is Emirates Telecommunications Group Company PJSC (ADX:ETISALAT) from its intrinsic value? Using the most recent financial data, we will examine whether the stock price is fair by taking the company’s projected future cash flows and discounting them to the present value. We will use the Discounted Cash Flow (DCF) model for this purpose. Before you think you can’t figure it out, just read on! It’s actually a lot less complex than you might imagine.
Remember though that there are many ways to estimate the value of a business and a DCF is just one method. For those who are passionate about stock analysis, the Simply Wall St analysis template here may interest you.
Check out our latest analysis for Emirates Telecommunications Group Company PJSC
The model
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.
A DCF is based on the idea that a dollar in the future is worth less than a dollar today, and so the sum of these future cash flows is then discounted to today’s value:
10-Year Free Cash Flow (FCF) Forecast
2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | |
Leveraged FCF (AED, Millions) | Ï.å8.64b | Ï.å8.61b | Ï.å9.96b | Ï.å10.4b | Ï.å11.0b | Ï.å11.7b | Ï.å12.5b | Ï.å13.5b | Ï.å14.5b | Ï.å15.7b |
Growth rate estimate Source | Analyst x3 | Analyst x2 | Analyst x1 | Analyst x1 | Is at 5.4% | Is at 6.44% | Is at 7.17% | Is at 7.69% | Is at 8.04% | Is at 8.3% |
Present value (AED, millions) discounted at 13% | د.إ7.7k | د.إ6.8k | د.إ7.0k | د.إ6.5k | د.إ6.0k | د.إ5.7k | د.إ5.4k | د.إ5.2k | د.إ5.0k | د.إ4.8k |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = Ï.å60b
After calculating the present value of future cash flows over the initial 10-year period, we need to calculate the terminal value, which takes into account all future cash flows beyond the first stage. 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 8.9%. We discount terminal cash flows to present value at a cost of equity of 13%.
Terminal value (TV)= FCF_{2032} × (1 + g) ÷ (r – g) = Ï,å16b× (1 + 8.9%) ÷ (13%– 8.9%) = Ï,å453b
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= Ï.å453b÷ ( 1 + 13%)^{ten}= د.إ137b
The total value is the sum of the cash flows for the next ten years plus the present terminal value, which gives the total equity value, which in this case is د.إ197b. In the last step, we divide the equity value by the number of shares outstanding. Compared to the current share price of د.إ24.2, 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.
Important assumptions
We emphasize that 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 entries, I recommend that you redo the calculations yourself and play around with them. The DCF also does not take into account the possible cyclicality of an industry, nor the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we consider Emirates Telecommunications Group Company 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 13%, which is based on a leveraged beta of 0.800. 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:
Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won’t be the only piece of analysis you look at for a company. It is not possible to obtain an infallible valuation with a DCF model. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, if the terminal value growth rate is adjusted slightly, it can significantly change the overall result. For Emirates Telecommunications Group Company PJSC, there are three relevant factors that you should investigate further:
- Financial health: Does ETISALAT have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors such as leverage and risk.
- Future earnings: How does ETISALAT’s growth rate compare to its peers and the market in general? 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.
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