Estimating The Fair Value Of Rabigh Refining and Petrochemical Company (TADAWUL:2380)

Key Insights

• Rabigh Refining and Petrochemical's estimated fair value is ر.س9.78 based on 2 Stage Free Cash Flow to Equity
• With ر.س11.10 share price, Rabigh Refining and Petrochemical appears to be trading close to its estimated fair value
• Our fair value estimate is 13% higher than Rabigh Refining and Petrochemical's analyst price target of ر.س8.69

How far off is Rabigh Refining and Petrochemical Company (TADAWUL:2380) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

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.

View our latest analysis for Rabigh Refining and Petrochemical

Step By Step Through The Calculation

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 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.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (SAR, Millions)	ر.س1.89b	ر.س2.92b	ر.س3.03b	ر.س3.19b	ر.س3.39b	ر.س3.64b	ر.س3.92b	ر.س4.23b	ر.س4.59b	ر.س4.98b
Growth Rate Estimate Source	Analyst x2	Analyst x1	Analyst x1	Est @ 5.21%	Est @ 6.34%	Est @ 7.14%	Est @ 7.69%	Est @ 8.08%	Est @ 8.35%	Est @ 8.55%
Present Value (SAR, Millions) Discounted @ 23%	ر.س1.5k	ر.س1.9k	ر.س1.6k	ر.س1.4k	ر.س1.2k	ر.س1.0k	ر.س903	ر.س792	ر.س696	ر.س613

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ر.س12b

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 9.0%. We discount the terminal cash flows to today's value at a cost of equity of 23%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = ر.س5.0b× (1 + 9.0%) ÷ (23%– 9.0%) = ر.س38b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ر.س38b÷ ( 1 + 23%)¹⁰= ر.س4.7b

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.س16b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of ر.س11.1, the company appears around fair value at the time of writing. 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.

Important 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. 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 Rabigh Refining and Petrochemical 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 23%, which is based on a levered beta of 2.000. 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.

Looking Ahead:

Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. 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 Rabigh Refining and Petrochemical, we've compiled three relevant items you should further research:

1. Risks: Be aware that Rabigh Refining and Petrochemical is showing 1 warning sign in our investment analysis , you should know about...
2. Future Earnings: How does 2380'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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.