Are investors undervaluing Emirates Integrated Telecommunications Company PJSC (DFM:DU) by 44%?

Does the June price of Emirates Integrated Telecommunications Company PJSC (DFM:DU) share reflect what it is really worth? Today we are going to estimate the intrinsic value of the stock by taking the expected future cash flows and discounting them to the present value. On this occasion, we will use the Discounted Cash Flow (DCF) model. 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. If you still have burning questions about this type of assessment, take a look at Simply Wall St.’s analysis template.

Check out our latest analysis for Emirates Integrated Telecommunications Company 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”. To begin with, we need to obtain cash flow estimates for 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, so we discount the value of these future cash flows to their estimated value in today’s dollars:

10-Year Free Cash Flow (FCF) Forecast

2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Leveraged FCF (AED, Millions) Ï.å1.34b د.إ1.59b Ï.å1.91b Ï.å2.17b Ï.å2.45b Ï.å2.73b Ï.å3.02b Ï.å3.33b Ï.å3.66b Ï.å4.01b
Growth rate estimate Source Analyst x1 Analyst x1 Analyst x1 Is at 14.15% Is at 12.59% Is at 11.5% Is at 10.74% Is at 10.21% Is at 9.83% Is at 9.57%
Present value (AED, millions) discounted at 13% د.إ1.2k د.إ1.3k د.إ1.3k د.إ1.3k د.إ1.3k د.إ1.3k د.إ1.3k د.إ1.3k د.إ1.2k د.إ1.2k

(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = Ï.å13b

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. For a number of reasons, a very conservative growth rate is used which cannot exceed that of a country’s GDP growth. In this case, we used the 5-year average of the 10-year government bond yield (9.0%) to estimate future growth. Similar to the 10-year “growth” period, we discount future cash flows to present value, using a cost of equity of 13%.

Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = Ï.å4.0b× (1 + 9.0%) ÷ (13%– 9.0%) = ï.å115b

Present value of terminal value (PVTV)= TV / (1 + r)ten= Ï.å115b÷ ( 1 + 13%)ten= Ï.Å35b

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.إ48b. The final step is to divide the equity value by the number of shares outstanding. Compared to the current share price of د.إ5.9, the company looks quite undervalued at a 44% discount to the current share price. Remember though that this is only a rough estimate, and like any complex formula – trash in, trash out.

DFM: discounted cash flows from June 16, 2022

The hypotheses

We emphasize that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you disagree with these results, try the math yourself and play around with the 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 consider Emirates Integrated Telecommunications 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:

While important, the DCF calculation will ideally not be the only piece of analysis you look at for a business. It is not possible to obtain an infallible valuation with a DCF model. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under/overvalued?” For example, changes in the company’s cost of equity or the risk-free rate can have a significant impact on the valuation. Can we understand why the company is trading at a discount to its intrinsic value? For Emirates Integrated Telecommunications Company PJSC, we have put together three important factors that you should consider in more detail:

  1. Risks: We believe that you should evaluate the 1 warning sign for Emirates Integrated Telecommunications Company PJSC we reported before investing in the company.
  2. Future earnings: How does DU’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.
  3. Other high-quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality actions to get an idea of ​​what you might be missing!

PS. The Simply Wall St app performs an updated cash flow valuation for each DFM stock every day. If you want to find the calculation for other stocks, search here.

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.

Sean B. Jackson