Estimated Intrinsic Value Allocation of Abu Dhabi National Oil Company PJSC (ADX:ADNOCDIST)

Today we will use a method to assess the intrinsic value of Abu Dhabi National Oil Company’s allocation of PJSC (ADX: ADNOCDIST) by taking expected future cash flows and discounting them to today’s value. One way to achieve this is to use 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.

Our analysis shows that ADNOCDIST may be overrated!

step by step

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. In the first stage, we need to estimate the cash flow of the business 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.

Usually we assume that a dollar today is worth more than a dollar in the future, 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.إ20b

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 15%.

Final Value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = US$6.5b × (1 + 8.9%) ÷ (15% – 8.9%) = US$120b

Present value of future value (PVTV)= TV / (1 + r)¹⁰= d.إ120b÷ (1 + 15%)¹⁰= d.إ31b

The total value is the sum of the cash flows for the next ten years plus the discounted future value, which is the total equity value, in this case د.إ51b. In the final step, we divide the equity value by the number of shares outstanding. Compared to the current share price of د.إ4.5, the company appears near fair value 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.

Important assumptions

Now, the most important input for discounted cash flow is the discount rate, and of course the actual cash flow. You don’t have to agree to these inputs, I suggest you redo the calculations yourself and use them. The DCF also does not take into account the cyclicality that an industry may have, or a company’s future capital needs, so it does not provide a complete picture of a company’s potential performance. Given that we consider Abu Dhabi National Oil Company for Distribution 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 15%, which is based on a leveraged beta of 1.021. 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.

SWOT Analysis of Abu Dhabi National Oil Company Distribution PJSC

Next step:

Valuation is only one side of the coin when it comes to building your investment thesis, and ideally it won’t be the only analysis you review for your 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. For example, if the terminal value growth rate is adjusted slightly, it can dramatically change the overall result. For Abu Dhabi National Oil Distribution Company PJSC, we have compiled three important items you should check out:

1. risk: For example, we find 4 warning signs for Abu Dhabi National Oil Company to distribute PJSC (2 is a bit off-putting!) What you should know before investing here.
2. future earnings: How does ADNOCDIST’s 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 entity business: Low debt, high returns on equity and a solid track record are the foundations of a strong business.why not explore Our interactive stock list has a solid business foundation See if there are any other companies you may not have considered!

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.