A Look At The Intrinsic Value Of The National Agricultural Development Company (TADAWUL:6010)

Key Insights

• National Agricultural Development's estimated fair value is ر.س54.56 based on 2 Stage Free Cash Flow to Equity
• National Agricultural Development's ر.س43.80 share price indicates it is trading at similar levels as its fair value estimate
• Peers of National Agricultural Development are currently trading on average at a 33% premium

Today we will run through one way of estimating the intrinsic value of The National Agricultural Development Company (TADAWUL:6010) by taking the expected future cash flows and discounting them to their present 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.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. 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 National Agricultural Development

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. In the first stage we need to estimate the cash flows to the business over the next ten years. 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) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (SAR, Millions)	ر.س286.0m	ر.س318.0m	ر.س374.5m	ر.س414.0m	ر.س451.9m	ر.س493.0m	ر.س537.8m	ر.س586.4m	ر.س639.3m	ر.س697.0m
Growth Rate Estimate Source	Analyst x2	Analyst x2	Analyst x2	Analyst x2	Est @ 9.15%	Est @ 9.10%	Est @ 9.07%	Est @ 9.05%	Est @ 9.03%	Est @ 9.02%
Present Value (SAR, Millions) Discounted @ 15%	ر.س249	ر.س242	ر.س248	ر.س239	ر.س227	ر.س216	ر.س206	ر.س195	ر.س186	ر.س177

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ر.س2.2b

The second stage is also known as Terminal Value, this is the business's cash flow after 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 15%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = ر.س697m× (1 + 9.0%) ÷ (15%– 9.0%) = ر.س13b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ر.س13b÷ ( 1 + 15%)¹⁰= ر.س3.4b

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.س5.5b. 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.س43.8, the company appears about fair value at a 20% 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.

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. 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 National Agricultural Development 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 0.800. 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.

Looking Ahead:

Whilst important, the DCF calculation 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. 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 instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For National Agricultural Development, we've put together three additional factors you should look at:

1. Risks: Take risks, for example - National Agricultural Development has 2 warning signs we think you should be aware of.
2. Future Earnings: How does 6010'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. 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.

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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.