Stock Analysis

Are Investors Undervaluing BinDawood Holding Company (TADAWUL:4161) By 45%?

SASE:4161
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Today we'll do a simple run through of a valuation method used to estimate the attractiveness of BinDawood Holding Company (TADAWUL:4161) as an investment opportunity 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. Don't get put off by the jargon, the math behind it is actually quite straightforward.

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. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

See our latest analysis for BinDawood Holding

Crunching The Numbers

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 (SAR, Millions) ر.س528.0m ر.س713.0m ر.س821.0m ر.س917.5m ر.س1.02b ر.س1.12b ر.س1.23b ر.س1.35b ر.س1.48b ر.س1.62b
Growth Rate Estimate Source Analyst x1 Analyst x1 Analyst x1 Est @ 11.75% Est @ 10.90% Est @ 10.31% Est @ 9.89% Est @ 9.60% Est @ 9.40% Est @ 9.25%
Present Value (SAR, Millions) Discounted @ 15% ر.س460 ر.س541 ر.س542 ر.س528 ر.س510 ر.س489 ر.س468 ر.س447 ر.س426 ر.س405

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ر.س4.8b

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 15%.

Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = ر.س1.6b× (1 + 8.9%) ÷ (15%– 8.9%) = ر.س30b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= ر.س30b÷ ( 1 + 15%)10= ر.س7.5b

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.س12b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of ر.س58.7, the company appears quite undervalued at a 45% 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
SASE:4161 Discounted Cash Flow February 8th 2023

The 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 BinDawood Holding 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 0.826. 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 BinDawood Holding

Strength
  • Currently debt free.
Weakness
  • Earnings declined over the past year.
  • Dividend is low compared to the top 25% of dividend payers in the Consumer Retailing market.
Opportunity
  • Annual earnings are forecast to grow faster than the Saudi market.
  • Good value based on P/E ratio and estimated fair value.
Threat
  • Dividends are not covered by earnings.
  • Revenue is forecast to grow slower than 20% per year.

Next Steps:

Valuation is only one side of the coin in terms of building your investment thesis, and it 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. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/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. Can we work out why the company is trading at a discount to intrinsic value? For BinDawood Holding, there are three fundamental items you should consider:

  1. Risks: Consider for instance, the ever-present spectre of investment risk. We've identified 4 warning signs with BinDawood Holding , and understanding these should be part of your investment process.
  2. Future Earnings: How does 4161'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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the SASE every day. If you want to find the calculation for other stocks just search here.

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

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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.