Are investors undervaluing integrated telecom company Emirates PJSC (DFM:DU) by 30%?
Today we are going to do a simple overview of a valuation method used to estimate the attractiveness of Emirates Integrated Telecommunications Company PJSC (DFM:DU) as an investment opportunity by taking the flows expected future cash flows of the business and discounting them to the present value. . The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Don’t be put off by the jargon, the underlying calculations are actually quite simple.
We draw your attention to the fact that there are many ways to value a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you want to know more about discounted cash flow, the rationale for this calculation can be read in detail in the Simply Wall St analysis template.
See our latest analysis for Emirates Integrated Telecommunications Company PJSC
The model
We use what is called a 2-step model, which simply means that we have two different periods of company cash flow growth rates. Generally, the first stage is a higher growth phase and the second stage is a lower growth phase. To start, we need to estimate the cash flows 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.
Generally, 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 their estimated value in today’s dollars:
Estimated free cash flow (FCF) over 10 years
2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | |
Leveraged FCF (AED, Millions) | د.إ1.59b | Ï.å1.91b | Ï.å2.08b | Ï.å2.12b | Ï.å2.21b | Ï.å2.33b | Ï.å2.48b | Ï.å2.66b | Ï.å2.86b | Ï.å3.09b |
Growth rate estimate Source | Analyst x1 | Analyst x1 | Analyst x1 | Analyst x1 | Is at 4.05% | Is at 5.5% | Is at 6.51% | Is at 7.22% | Is at 7.72% | Is at 8.07% |
Present value (AED, millions) discounted at 13% | د.إ1.4k | د.إ1.5k | د.إ1.5k | د.إ1.3k | د.إ1.2k | د.إ1.1k | د.إ1.1k | د.إ1.0k | د.إ979 | د.إ939 |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = Ï.å12b
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 (8.9%) 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)= FCF_{2032} × (1 + g) ÷ (r – g) = Ï.å3.1b× (1 + 8.9%) ÷ (13%– 8.9%) = ï.å89b
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= Ï.å89b÷ ( 1 + 13%)^{ten}= Ï.å27b
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.إ39b. The final step is to divide the equity value by the number of shares outstanding. Compared to the current share price of د.إ6.0, the company looks quite undervalued at a 30% discount to the current share price. The assumptions of any calculation have a big impact on the valuation, so it’s best to consider this as a rough estimate, not accurate down to the last penny.
Important assumptions
The above calculation is highly dependent on two assumptions. One is the discount rate and the other is the 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, 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 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:
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. DCF models are not the be-all and end-all of investment valuation. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under/overvalued?” If a company grows at a different pace, or if its cost of equity or risk-free rate changes sharply, output may be very different. Why is intrinsic value higher than the current stock price? For Emirates Integrated Telecommunications Company PJSC, we have put together three important factors to consider:
- Risks: Be aware that Emirates Integrated Telecommunications Company PJSC displays 1 warning sign in our investment analysis you should know…
- 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.
- 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. 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.
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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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