Is Al Meera Consumer Goods Company Q.P.S.C. (DSM:MERS) Trading At A 22% Discount?

Key Insights

• Al Meera Consumer Goods Company Q.P.S.C's estimated fair value is ر.ق21.9 based on 2 Stage Free Cash Flow to Equity
• Current share price of ر.ق17.0 suggests Al Meera Consumer Goods Company Q.P.S.C is 22% undervalued
• Al Meera Consumer Goods Company Q.P.S.C's peers are currently trading at a premium of 483% on average

Does the January share price for Al Meera Consumer Goods Company Q.P.S.C. (DSM:MERS) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by projecting its future cash flows and then discounting them to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.

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.

Check out our latest analysis for Al Meera Consumer Goods Company Q.P.S.C

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. 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) forecast

	2023	2024	2025	2026	2027	2028	2029	2030	2031	2032
Levered FCF (QAR, Millions)	ر.ق260.2m	ر.ق274.8m	ر.ق295.0m	ر.ق315.8m	ر.ق339.8m	ر.ق367.0m	ر.ق397.2m	ر.ق430.7m	ر.ق467.6m	ر.ق508.1m
Growth Rate Estimate Source	Analyst x2	Analyst x1	Analyst x1	Est @ 7.06%	Est @ 7.60%	Est @ 7.98%	Est @ 8.25%	Est @ 8.44%	Est @ 8.57%	Est @ 8.66%
Present Value (QAR, Millions) Discounted @ 14%	ر.ق228	ر.ق210	ر.ق197	ر.ق185	ر.ق174	ر.ق164	ر.ق155	ر.ق147	ر.ق140	ر.ق133

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ر.ق1.7b

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) = ر.ق508m× (1 + 8.9%) ÷ (14%– 8.9%) = ر.ق10b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ر.ق10b÷ ( 1 + 14%)¹⁰= ر.ق2.6b

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 ر.ق4.4b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of ر.ق17.0, the company appears a touch undervalued at a 22% 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.

Important Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Al Meera Consumer Goods Company Q.P.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.

SWOT Analysis for Al Meera Consumer Goods Company Q.P.S.C

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. 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 example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Why is the intrinsic value higher than the current share price? For Al Meera Consumer Goods Company Q.P.S.C, we've put together three pertinent items you should assess:

1. Risks: Take risks, for example - Al Meera Consumer Goods Company Q.P.S.C has 1 warning sign we think you should be aware of.
2. Future Earnings: How does MERS'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 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!

PS. Simply Wall St updates its DCF calculation for every Qatari 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.