A Look At The Fair Value Of Gulf Medical Projects Company (PJSC) (ADX:GMPC)

Key Insights

• Gulf Medical Projects Company (PJSC)'s estimated fair value is د.إ2.18 based on 2 Stage Free Cash Flow to Equity
• Current share price of د.إ1.95 suggests Gulf Medical Projects Company (PJSC) is potentially trading close to its fair value
• The average premium for Gulf Medical Projects Company (PJSC)'s competitorsis currently 362%

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Gulf Medical Projects Company (PJSC) (ADX:GMPC) as an investment opportunity by taking the forecast future cash flows of the company and discounting them back to today's value. This will be done using the Discounted Cash Flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

Check out our latest analysis for Gulf Medical Projects Company (PJSC)

Is Gulf Medical Projects Company (PJSC) Fairly Valued?

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To begin with, we have to get estimates of 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.

Generally we assume that a dollar today is more valuable 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) forecast

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (AED, Millions)	د.إ90.4m	د.إ95.4m	د.إ101.7m	د.إ109.1m	د.إ117.7m	د.إ127.3m	د.إ138.0m	د.إ149.8m	د.إ162.9m	د.إ177.2m
Growth Rate Estimate Source	Est @ 4.08%	Est @ 5.55%	Est @ 6.59%	Est @ 7.31%	Est @ 7.81%	Est @ 8.17%	Est @ 8.41%	Est @ 8.59%	Est @ 8.71%	Est @ 8.79%
Present Value (AED, Millions) Discounted @ 14%	د.إ79.0	د.إ72.9	د.إ67.9	د.إ63.7	د.إ60.0	د.إ56.7	د.إ53.7	د.إ51.0	د.إ48.4	د.إ46.1

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = د.إ599m

The second stage is also known as Terminal Value, this is the business's cash flow after 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.إ177m× (1 + 9.0%) ÷ (14%– 9.0%) = د.إ3.6b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= د.إ3.6b÷ ( 1 + 14%)¹⁰= د.إ924m

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is د.إ1.5b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of د.إ2.0, the company appears about fair value at a 11% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

Important 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. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. 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 Gulf Medical Projects 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 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.

SWOT Analysis for Gulf Medical Projects Company (PJSC)

Next Steps:

Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn't be the only metric you look at when researching 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. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For Gulf Medical Projects Company (PJSC), there are three relevant factors you should assess:

1. Risks: As an example, we've found 3 warning signs for Gulf Medical Projects Company (PJSC) (2 don't sit too well with us!) that you need to consider before investing here.
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.