A Look At The Intrinsic Value Of Alpha Dhabi Holding PJSC (ADX:ALPHADHABI)

Key Insights

• Alpha Dhabi Holding PJSC's estimated fair value is د.إ20.94 based on 2 Stage Free Cash Flow to Equity
• Alpha Dhabi Holding PJSC's د.إ21.42 share price indicates it is trading at similar levels as its fair value estimate
• Peers of Alpha Dhabi Holding PJSC are currently trading on average at a 36% discount

In this article we are going to estimate the intrinsic value of Alpha Dhabi Holding PJSC (ADX:ALPHADHABI) by taking the forecast future cash flows of the company and discounting them back to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. It may sound complicated, but actually it is quite simple!

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

See our latest analysis for Alpha Dhabi Holding PJSC

What's The Estimated Valuation?

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To start off with, we need to estimate the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

A DCF is all about the idea that a dollar in the future is less valuable 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) estimate

	2023	2024	2025	2026	2027	2028	2029	2030	2031	2032
Levered FCF (AED, Millions)	د.إ11.7b	د.إ13.6b	د.إ15.6b	د.إ17.5b	د.إ19.6b	د.إ21.7b	د.إ23.9b	د.إ26.2b	د.إ28.8b	د.إ31.4b
Growth Rate Estimate Source	Est @ 20.03%	Est @ 16.70%	Est @ 14.37%	Est @ 12.73%	Est @ 11.59%	Est @ 10.79%	Est @ 10.23%	Est @ 9.84%	Est @ 9.56%	Est @ 9.37%
Present Value (AED, Millions) Discounted @ 16%	د.إ10.1k	د.إ10.2k	د.إ10.1k	د.إ9.8k	د.إ9.5k	د.إ9.1k	د.إ8.6k	د.إ8.2k	د.إ7.8k	د.إ7.3k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = د.إ91b

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (8.9%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 16%.

Terminal Value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = د.إ31b× (1 + 8.9%) ÷ (16%– 8.9%) = د.إ509b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= د.إ509b÷ ( 1 + 16%)¹⁰= د.إ119b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is د.إ209b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of د.إ21.4, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

The Assumptions

We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Alpha Dhabi Holding 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 accounts for debt. In this calculation we've used 16%, which is based on a levered beta of 0.991. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Looking Ahead:

Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Alpha Dhabi Holding PJSC, we've compiled three relevant factors you should look at:

1. Risks: Take risks, for example - Alpha Dhabi Holding PJSC has 1 warning sign we think you should be aware of.
2. Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
3. Other Top Analyst Picks: Interested to see what the analysts are thinking? Take a look at our interactive list of analysts' top stock picks to find out what they feel might have an attractive future outlook!

PS. Simply Wall St updates its DCF calculation for every Emirian stock every day, 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 provide commentary based on historical data and analyst forecasts only using an unbiased methodology 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.