A Look at the Intrinsic Value of Abu Dhabi National Energy Company PJSC (ADX:TAQA)

key insights

• Abu Dhabi National Energy Company PJSC has an estimated fair value of د.إ3.60 based on 2-stage equity free cash flow
• Abu Dhabi national energy company PJSC’s د.إ3.26 share price suggests it is trading at a similar level to its fair value estimate
• andIndustry average discount to fair value of 3.4%, Rivals of Abu Dhabi’s national energy company PJSC appear to be trading at lower discounts

Abu Dhabi National Energy Company PJSC (ADX: Waterfall) reflect its true value? Today, we’ll estimate the intrinsic value of a stock by taking expected future cash flows and discounting them to today’s value. To do this, we will utilize a discounted cash flow (DCF) model. Believe it or not, it’s not that hard to understand, as you’ll see from our example!

We would like to remind that there are many ways of valuing companies, and as with DCF, each method has advantages and disadvantages in certain situations.Anyone interested in learning more about intrinsic value should read Simply Wall St Analysis Model.

Check out our latest analysis for Abu Dhabi National Energy Corporation PJSC

the model

We will use a two-stage DCF model, which, as the name suggests, considers two growth stages. The first phase is usually a period of higher growth, with the final value captured in the second “steady growth” period leveling off. In the first stage, we need to estimate the cash flow of the business for the next ten years. Where possible, we use analysts’ estimates, but when these are not available, we extrapolate prior free cash flow (FCF) based on the last estimate or reported value. We assume that companies with shrinking free cash flow will contract at a slower rate, while companies with growing free cash flow will experience slower growth rates over the period. We do this to reflect that growth tends to slow more in earlier years than in later years.

Usually we assume that a dollar today is worth more than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-Year Free Cash Flow (FCF) Estimation

(“Est” = Simply Wall St estimated FCF growth rate)
10-Year Present Value of Cash Flows (PVCF) = 157b dr

After calculating the present value of future cash flows for the first 10 years, we need to calculate the terminal value, which covers all future cash flows after the first period. The Gordon Growth Formula is used to calculate the future annual growth rate equal to the terminal value of the 5-year average of the 10-year government bond yield of 8.9%. We discount the terminal cash flows to today’s value at a cost of equity of 14%.

Future Value (TV)= free cash flow₂₀₃₂ × (1 + g) ÷ (r – g) = $47b× (1 + 8.9%) ÷ (14% – 8.9%) = $946b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= d.إ946b÷ (1 + 14%)¹⁰= d.إ247b

The total value is the sum of the cash flows over the next ten years plus the discounted future value to give the total equity value, in this case د.إ404b. The final step is to divide the equity value by the number of shares outstanding. Relative to the current share price of د.إ3.3, the company’s fair value represents a 9.4% discount to the current share price. However, estimates are imprecise tools, like telescopes – shift a few degrees and end up in different galaxies. Please keep this in mind.

important assumptions

Now the most important input to discounted cash flows is the discount rate and of course the actual cash flows. You don’t have to agree with these inputs, I suggest you recalculate it yourself and try it out. The DCF also does not take into account the likely cyclicality of the industry or the future capital requirements of the company, so it does not give the full picture of the company’s potential performance. Given that we consider Abu Dhabi National Energy 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) accounting for debt. In this calculation, we used 14%, which is based on a leveraged beta of 0.800. Beta is a measure of a stock’s volatility relative to the overall market. Our beta is derived from the industry average beta of globally comparable companies, limited between 0.8 and 2.0, which is a reasonable range for a stable business.

SWOT Analysis of Abu Dhabi National Energy Company PJSC

continue:

While important, DCF calculations ideally won’t be the only analysis you review for a company. The DCF model is not the be all and end all of investment valuation. It’s best if you apply different cases and assumptions and see how they affect the company’s valuation. For example, changes in a company’s cost of equity or the risk-free rate can have a significant impact on valuations. For Abu Dhabi National Energy Corporation PJSC, we’ve put together three factors you should research further:

1. risk: realized Abu Dhabi National Energy Company PJSC is demonstrating 1 warning sign in our investment analysis ,You should know…
2. future earnings: How does TAQA’s growth rate compare to its peers and the broader market?Gain insight into analyst consensus numbers for the next few years by interacting with us Free Analyst Growth Expectations Chart.
3. Other entity business: Low debt, high return on equity and good track record are the foundation of a strong business.why not explore Our interactive stock list with solid business fundamentals Check out other companies you might not have considered!

postscript. Simply Wall St updates the DCF calculation for each Emirian stock daily, so if you want to find the intrinsic value of any other stock, just search here.

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This article by Simply Wall St is general in nature. We use only an unbiased methodology to provide reviews based on historical data and analyst forecasts, and our articles are not intended to be financial advice. It does not constitute a recommendation 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 analysis driven by fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no positions in any of the stocks mentioned.