Are investors in Abu Dhabi Ports Company PJSC (ADX:ADPORTS) paying more than intrinsic value?

In this article, we will estimate the intrinsic value of Abu Dhabi Ports Company PJSC (ADX: ADPORTS) by taking the expected future cash flows and discounting them to their present value. This will be done using a Discounted Cash Flow (DCF) model. Although it may look complicated, it’s actually not that much.

A company can be valued in a number of ways, so we would point out that DCF is not suitable for all situations.Anyone interested in learning more about intrinsic value should read Simple Wall Street Analysis Model.

Check out our latest analysis for Abu Dhabi Ports Company PJSC

Is Abu Dhabi Ports Company PJSC’s Valuation Fair?

We are using a two-stage growth model, which means we consider two stages of a company’s growth. In the initial stage, a company may have a higher growth rate, while the second stage is generally considered to have a steady growth rate. First, we need to estimate cash flow for the next ten years. Where possible, we use analyst estimates, but when these estimates are not available, we extrapolate prior free cash flow (FCF) from last estimated or reported values. We assume that companies with shrinking free cash flow will slow their rate of contraction, while companies with growing free cash flow will see their growth rate slow during this period. We do this to reflect that growth in early years tends to slow more than in later years.

DCF is about the idea that a dollar in the future is worth less than a dollar today, so we discount the value of these future cash flows to an estimate in today’s dollars:

10-Year Free Cash Flow (FCF) Forecast

(“Est” = Simple Wall Street estimated FCF growth rate)
10-Year Present Value of Cash Flows (PVCF) = D.3.0b

We now need to calculate the future value, which accounts for all future cash flows after this decade. Gordon’s growth formula is used to calculate the terminal value of the future annual growth rate equal to the 5-year average of the 10-year government bond yield of 8.9%. We discount the terminal cash flow to today’s value at a cost of equity of 13%.

Final Value (TV)= FCF₂₀₃₂ x (1 + g) ÷ (r – g) = $2.5bx (1 + 8.9%) ÷ (13% – 8.9%) = $65b

Present value of future value (PVTV)= TV / (1 + r)¹⁰= D. 65 b ÷ (1 + 13%)¹⁰= D.Ô 19b

The total value or equity value is the sum of the present values ​​of future cash flows, in this case د.إ22b. To get the intrinsic value per share, we divide it by the total number of shares outstanding. Relative to its current share price of د.إ5.5, the company appears to be slightly overvalued at the time of writing. However, estimates are imprecise tools, like telescopes — move a few degrees and end up in different galaxies. Please keep this in mind.

Assumption

We would point out that the most important input to discounted cash flow is the discount rate, and of course actual cash flow. If you don’t agree with these results, do your own calculations and make assumptions. DCF also does not take into account the cyclical nature of an industry, or a company’s future capital needs, so it does not fully reflect a company’s underlying performance. Given that we consider Abu Dhabi Ports Company PJSC as a potential shareholder, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC), which is a percentage of debt. In this calculation, we used 13%, which is based on a leveraged beta of 0.874. Beta is a measure of a stock’s volatility compared to the overall market. We derive our betas from the industry average betas of globally comparable companies, and enforce a limit between 0.8 and 2.0, which is a reasonable range for a stable business.

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While a company’s valuation is important, it shouldn’t be the only metric you use when researching a company. A foolproof valuation cannot be obtained using the DCF model. Ideally you will apply different cases and assumptions and see how they will affect the valuation of the company. If a company grows at different rates, or if its cost of equity or risk-free rate changes dramatically, the output may look very different. Why is the stock price exceeding intrinsic value? For Abu Dhabi Ports Company PJSC, we’ve put together three essential areas you should explore:

1. risk: For example, we find 2 warning signs for Abu Dhabi Ports Company PJSC (1 is important) You should know.
2. future earnings: How does ADPORTS’ growth rate compare to its peers and the broader market?Dig deeper into analyst consensus numbers for the next few years by engaging with us Free Analyst Growth Expectations Chart.
3. Other high-quality alternatives: Do you like a good generalist?explore Our interactive list of quality stocks To find out what else you might be missing!

PS.Wall Street updates the DCF calculation for each Emirian stock every day, so if you want to find the intrinsic value of any other stock, simply search here.

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This article by Simply Wall St is general in nature. We provide commentary based solely on historical data and analyst forecasts using an unbiased methodology and our articles are not intended to provide financial advice. It does not constitute advice to buy or sell any stock and does not take into account your objectives or your financial situation. Our goal is to bring you long-term focused analytics driven by fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Wall Street has no positions in any of the stocks mentioned.