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

In this article we are going to estimate the intrinsic value of Mesaieed Petrochemical Holding Company Q.P.S.C. (DSM:MPHC) by taking the expected future cash flows and discounting them to their present value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Don't get put off by the jargon, the math behind it is actually quite straightforward.

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.

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

Is Mesaieed Petrochemical Holding Company Q.P.S.C 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. 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.

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

	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%	Est @ 8.26%	Est @ 8.44%	Est @ 8.57%	Est @ 8.66%
Present Value (QAR, Millions) Discounted @ 14%	ر.ق1.6k	ر.ق1.5k	ر.ق1.4k	ر.ق1.3k	ر.ق1.3k	ر.ق1.2k	ر.ق1.1k	ر.ق1.1k	ر.ق1.0k	ر.ق986

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ر.ق13b

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (8.9%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 14%.

Terminal Value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = ر.ق3.6b× (1 + 8.9%) ÷ (14%– 8.9%) = ر.ق80b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ر.ق80b÷ ( 1 + 14%)¹⁰= ر.ق22b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ر.ق35b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of ر.ق2.3, the company appears about fair value at a 16% 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.

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 14%, which is based on a levered beta of 0.914. 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:

Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. 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 Mesaieed Petrochemical Holding Company Q.P.S.C, we've put together three fundamental aspects you should assess:

1. Risks: We feel that you should assess the 1 warning sign for Mesaieed Petrochemical Holding Company Q.P.S.C we've flagged before making an investment in the company.
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.