Calculating The Intrinsic Value Of Dubai Refreshment (P.J.S.C.) (DFM:DRC)

Key Insights

• Dubai Refreshment (P.J.S.C.)'s estimated fair value is د.إ16.95 based on 2 Stage Free Cash Flow to Equity
• Current share price of د.إ18.00 suggests Dubai Refreshment (P.J.S.C.) is potentially trading close to its fair value
• Industry average of 576% suggests Dubai Refreshment (P.J.S.C.)'s peers are currently trading at a higher premium to fair value

In this article we are going to estimate the intrinsic value of Dubai Refreshment (P.J.S.C.) (DFM:DRC) by projecting its future cash flows and then discounting them 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. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

See our latest analysis for Dubai Refreshment (P.J.S.C.)

Is Dubai Refreshment (P.J.S.C.) Fairly Valued?

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 need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) forecast

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (AED, Millions)	د.إ100.9m	د.إ102.3m	د.إ106.0m	د.إ111.6m	د.إ118.8m	د.إ127.3m	د.إ137.1m	د.إ148.2m	د.إ160.6m	د.إ174.3m
Growth Rate Estimate Source	Est @ -1.85%	Est @ 1.40%	Est @ 3.68%	Est @ 5.27%	Est @ 6.39%	Est @ 7.17%	Est @ 7.71%	Est @ 8.10%	Est @ 8.36%	Est @ 8.55%
Present Value (AED, Millions) Discounted @ 14%	د.إ88.2	د.إ78.1	د.إ70.8	د.إ65.1	د.إ60.6	د.إ56.7	د.إ53.4	د.إ50.4	د.إ47.8	د.إ45.3

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = د.إ616m

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. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 9.0%. We discount the terminal cash flows to today's value at a cost of equity of 14%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = د.إ174m× (1 + 9.0%) ÷ (14%– 9.0%) = د.إ3.5b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= د.إ3.5b÷ ( 1 + 14%)¹⁰= د.إ909m

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.إ1.5b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of د.إ18.0, the company appears around fair value at the time of writing. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

The Assumptions

Now 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 Dubai Refreshment (P.J.S.C.) 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 14%, which is based on a levered beta of 0.800. 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.

Moving On:

Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. It's not possible to obtain a foolproof valuation with a DCF model. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Dubai Refreshment (P.J.S.C.), we've compiled three pertinent items you should consider:

1. Risks: Case in point, we've spotted 2 warning signs for Dubai Refreshment (P.J.S.C.) you should be aware of, and 1 of them is potentially serious.
2. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
3. Other Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the DFM every day. If you want to find the calculation for other stocks 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.