Stock Analysis

A Look At The Intrinsic Value Of Abu Dhabi National Energy Company PJSC (ADX:TAQA)

ADX:TAQA
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Key Insights

  • The projected fair value for Abu Dhabi National Energy Company PJSC is د.إ3.60 based on 2 Stage Free Cash Flow to Equity
  • Abu Dhabi National Energy Company PJSC's د.إ3.26 share price indicates it is trading at similar levels as its fair value estimate
  • When compared to theindustry average discount to fair value of 3.4%, Abu Dhabi National Energy Company PJSC's competitors seem to be trading at a lesser discount

Does the April share price for Abu Dhabi National Energy Company PJSC (ADX:TAQA) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the expected future cash flows and discounting them to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Believe it or not, it's not too difficult to follow, as you'll see from our example!

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

View our latest analysis for Abu Dhabi National Energy Company PJSC

The Model

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. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or 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) estimate

2023 2024 2025 2026 2027 2028 2029 2030 2031 2032
Levered FCF (AED, Millions) د.إ20.8b د.إ25.1b د.إ27.0b د.إ29.0b د.إ31.3b د.إ33.9b د.إ36.8b د.إ39.9b د.إ43.4b د.إ47.2b
Growth Rate Estimate Source Analyst x1 Analyst x1 Analyst x1 Est @ 7.49% Est @ 7.92% Est @ 8.22% Est @ 8.43% Est @ 8.58% Est @ 8.68% Est @ 8.75%
Present Value (AED, Millions) Discounted @ 14% د.إ18.2k د.إ19.2k د.إ18.1k د.إ17.0k د.إ16.0k د.إ15.2k د.إ14.4k د.إ13.7k د.إ13.0k د.إ12.3k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = د.إ157b

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 8.9%. We discount the terminal cash flows to today's value at a cost of equity of 14%.

Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = د.إ47b× (1 + 8.9%) ÷ (14%– 8.9%) = د.إ946b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= د.إ946b÷ ( 1 + 14%)10= د.إ247b

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.إ404b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of د.إ3.3, the company appears about fair value at a 9.4% discount to where the stock price trades currently. 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.

dcf
ADX:TAQA Discounted Cash Flow April 10th 2023

Important 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 Abu Dhabi National Energy 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 Abu Dhabi National Energy Company PJSC

Strength
  • Earnings growth over the past year exceeded the industry.
  • Debt is well covered by earnings and cashflows.
Weakness
  • Dividend is low compared to the top 25% of dividend payers in the Integrated Utilities market.
Opportunity
  • Annual earnings are forecast to grow faster than the Emirian market.
  • Good value based on P/E ratio and estimated fair value.
Threat
  • No apparent threats visible for TAQA.

Moving On:

Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. DCF models are not the be-all and end-all of investment valuation. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Abu Dhabi National Energy Company PJSC, we've compiled three further factors you should further research:

  1. Risks: Be aware that Abu Dhabi National Energy Company PJSC is showing 1 warning sign in our investment analysis , you should know about...
  2. Future Earnings: How does TAQA's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
  3. 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!

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.

Valuation is complex, but we're helping make it simple.

Find out whether Abu Dhabi National Energy Company PJSC is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.