Calculating The Intrinsic Value Of Enma Al Rawabi Investment & Real Estate Development Company (TADAWUL:9521)

Key Insights

• Enma Al Rawabi Investment & Real Estate Development's estimated fair value is ر.س18.0 based on 2 Stage Free Cash Flow to Equity
• Current share price of ر.س21.0 suggests Enma Al Rawabi Investment & Real Estate Development is trading close to its fair value
• Industry average of 249% suggests Enma Al Rawabi Investment & Real Estate Development's peers are currently trading at a higher premium

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Enma Al Rawabi Investment & Real Estate Development Company (TADAWUL:9521) as an investment opportunity by taking the expected future cash flows and discounting them to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. 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 Enma Al Rawabi Investment & Real Estate Development

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. In the first stage we need to estimate the cash flows to the business over the next ten years. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last 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.س41.5m	ر.س48.7m	ر.س55.9m	ر.س63.1m	ر.س70.6m	ر.س78.2m	ر.س86.3m	ر.س94.8m	ر.س103.8m	ر.س113.6m
Growth Rate Estimate Source	Est @ 20.87%	Est @ 17.27%	Est @ 14.75%	Est @ 12.99%	Est @ 11.75%	Est @ 10.89%	Est @ 10.28%	Est @ 9.86%	Est @ 9.56%	Est @ 9.35%
Present Value (SAR, Millions) Discounted @ 16%	ر.س35.8	ر.س36.2	ر.س35.9	ر.س35.0	ر.س33.7	ر.س32.2	ر.س30.7	ر.س29.1	ر.س27.5	ر.س25.9

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ر.س322m

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 8.9%. We discount the terminal cash flows to today's value at a cost of equity of 16%.

Terminal Value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = ر.س114m× (1 + 8.9%) ÷ (16%– 8.9%) = ر.س1.8b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= ر.س1.8b÷ ( 1 + 16%)¹⁰= ر.س400m

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.س721m. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of ر.س21.0, 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

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 Enma Al Rawabi Investment & Real Estate 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 16%, which is based on a levered beta of 1.008. 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 Enma Al Rawabi Investment & Real Estate Development

Next Steps:

Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn't be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Enma Al Rawabi Investment & Real Estate Development, we've compiled three essential elements you should further research:

1. Risks: For instance, we've identified 3 warning signs for Enma Al Rawabi Investment & Real Estate Development (2 don't sit too well with us) you should be aware of.
2. 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!
3. Other Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!

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.