A Look At The Fair Value Of Mesaieed Petrochemical Holding Company Q.P.S.C. (DSM:MPHC)

Key Insights

• Mesaieed Petrochemical Holding Company Q.P.S.C's estimated fair value is ر.ق2.1 based on 2 Stage Free Cash Flow to Equity
• Current share price of ر.ق2.2 suggests Mesaieed Petrochemical Holding Company Q.P.S.C is trading close to its fair value
• Industry average of 668% suggests Mesaieed Petrochemical Holding Company Q.P.S.C's peers are currently trading at a higher premium

Today we will run through one way of estimating the intrinsic value of Mesaieed Petrochemical Holding Company Q.P.S.C. (DSM:MPHC) by taking the forecast future cash flows of the company and discounting them back to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. 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. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

Check out our latest analysis for Mesaieed Petrochemical Holding Company Q.P.S.C

The Model

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. 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) estimate

	2023	2024	2025	2026	2027	2028	2029	2030	2031	2032
Levered FCF (QAR, Millions)	ر.ق1.84b	ر.ق1.95b	ر.ق2.07b	ر.ق2.22b	ر.ق2.39b	ر.ق2.58b	ر.ق2.79b	ر.ق3.03b	ر.ق3.29b	ر.ق3.58b
Growth Rate Estimate Source	Analyst x1	Analyst x1	Est @ 6.32%	Est @ 7.08%	Est @ 7.62%	Est @ 8.00%	Est @ 8.26%	Est @ 8.44%	Est @ 8.57%	Est @ 8.66%
Present Value (QAR, Millions) Discounted @ 15%	ر.ق1.6k	ر.ق1.5k	ر.ق1.4k	ر.ق1.3k	ر.ق1.2k	ر.ق1.1k	ر.ق1.0k	ر.ق972	ر.ق916	ر.ق863

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ر.ق12b

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 15%.

Terminal Value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = ر.ق3.6b× (1 + 8.9%) ÷ (15%– 8.9%) = ر.ق61b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ر.ق61b÷ ( 1 + 15%)¹⁰= ر.ق15b

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.ق26b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of ر.ق2.2, 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.

Important Assumptions

Now 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 Mesaieed Petrochemical Holding 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 15%, which is based on a levered beta of 0.934. 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 Mesaieed Petrochemical Holding Company Q.P.S.C

Next Steps:

Although the valuation of a company is important, 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. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. 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 Mesaieed Petrochemical Holding Company Q.P.S.C, we've put together three additional aspects you should further research:

1. Risks: Case in point, we've spotted 1 warning sign for Mesaieed Petrochemical Holding Company Q.P.S.C you should be aware of.
2. Future Earnings: How does MPHC'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.