Today we will do a simple step by step evaluation method used to evaluate the attractiveness of Agthia Group PJSC (ADX:AGTHIA) for the benefit of investing in evaluating the future earnings of the company and reducing them to the current price. Our analysis will use the Discounted Cash Flow (DCF) model. It may sound complicated, but it’s actually very simple!
In general, we believe that the value of a company is the present value of all the money it will generate in the future. However, DCF is only one valuation among many, and it is not without its flaws. If you want to know more about the discounted income, you can read the reasons behind this calculation in detail. A simple Wall St survey model.
Agthia Group PJSC’s latest financial statement of income is 31/12/2019
We will use a two-stage DCF model, which, as the name suggests, assumes two stages of growth. The first phase is generally a period of higher growth that rises to a terminal value, captured by a second ‘constant growth’ period. In the first step, we need to estimate the company’s revenue for the next ten years. Where possible, we use analyst estimates, but when these are not available, we multiply the forward free cash flow (FCF) from the latest valuation or stated value. We believe that companies with declining free cash flow will slow their rate of decline, and companies with increasing free cash flow will see their growth rate increase during this period. We do this to show that growth is slower in the first year than in subsequent years.
DCF is about the idea that a dollar in the future is worth less than a dollar today, so we discount the value of those future cash flows by their value in today’s dollars:
10-year free cash flow (FCF) forecast.
|Levered FCF (AED, millions)||د.إ359.0m||د.إ381.2m||د.إ411.5m||د.إ371.0m||د.إ356.2m||د.إ355.7m||د.إ364.8m||د.إ381.0m||د.إ403.0m||د.إ430.1m|
|Source Estimated growth rate||Investigator x2||Investigator x2||Investigator x2||Investigator x1||Estimate @ -4.00%||Estimate @ -0.14%||Estimate @ 2.56%||Estimate @ 4.46%||Rate @ 5.78%||Estimate @ 6.71%|
|Current value (AED, millions) discount @ 15%||d.إ313||d.إ290||d.إ273||d.إ215||د.إ180||d.إ157||d.إ140||د.إ128||د.إ118||d.إ110|
(“Est” = FCF growth rate estimated by Simply Wall St)
Present Value of 10-Year Cash Flow (PVCF) = د.إ1.9b
The second stage is known as Terminal Value, it is the money of the company after the first stage. The Gordon Growth formula is used to estimate the terminal value of a future annual growth rate equal to the 5-year average yield on a 10-year government bond at 8.9%. We discount the terminal’s income from the current price at the cost of equity of 15%.
Terminal cost (TV)= FCF2032 × (1 + g) ÷ (r – g) = د.إ430m× (1 + 8.9%) ÷ (15%– 8.9%) = د.إ8.2b
Current Terminal Value (PVTV)= TV / (1 + r)10= د.إ8.2b÷ ( 1 + 15%)10= د.إ2.1b
The total value, or the value of equity, is the sum of the present value of the future income, which in this case is د.إ4.0b. The final step is to divide the equity value by the number of shares outstanding. Compared to the current price of د.إ4.2, the company represents a fair value at a 17% discount to where the stock is currently priced. now. But remember, this is only a rough estimate, and like all complex formulas – garbage in, garbage out.
An important point
It should be noted that the main input to the discount rate is the discount rate and of course the actual income. Part of investing comes down to a personal assessment of a company’s performance, so try the math and see your own predictions. DCF also does not take into account the likely cycle of an industry, or a company’s capital requirements, so it does not provide a complete picture of a company’s potential performance. Given that we are looking at Agthia Group PJSC as a potential shareholder, the cost of equity is used as a discount rate, not the cost of capital (or the average value of capital, WACC) that creates debt. In this calculation we used 15%, which is based on a leveraged beta of 0.857. Beta is a measure of a stock’s volatility, relative to the overall market. We obtain the beta from the average beta of the industry of comparable companies in the world, with a limit set between 0.8 and 2.0, which is average for stable companies.
SWOT Analysis for Agthia Group PJSC
- Revenue growth outpaced the industry last year.
- Debt is well covered by income.
- Dividends are covered by net income and net income.
- The dividend is low compared to the top 25% of food market dividend payers.
- Annual revenue is expected to grow faster than the Emirati market.
- The current share price is below our valuation estimate.
- Debt is not adequately covered by operating cash flow.
- Annual revenue is expected to grow more slowly than the Emirati market.
Valuation is only one side of the coin when it comes to building an investment thesis, and it shouldn’t be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. But it should be seen as a guide to “what should be considered correct for this stock to be under/overvalued?” For example, changes in the company’s value or the risk-free rate can have a significant impact on the valuation. For Agthia Group PJSC, we have collected three important elements that should be explored further:
- Financial health: Does AGTHIA have a healthy balance sheet? Check out ours free paper analysis with six simple checks on key factors such as leverage and risk.
- Future money: How does AGTHIA’s growth rate compare to its peers and the broader market? Go deeper into next year’s consensus numbers by contacting our free analyst growth charter.
- Another good quality alternative: Do you like all good players? to see We list high-quality stocks to get an idea of what else is out there that you might not see!
PS. Simply Wall St updates the DCF calculator for Emirati stocks every day, so if you want to see the value of other stocks, search here.
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This article by Simply Wall St is general in nature. We only provide commentary based on historical data and analyst forecasts using unbiased methods and our articles are not intended as financial advice. There is no recommendation to buy or sell stocks, and it doesn’t take into account your goals, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Please note that our analysis may not include final company statements or quality materials. Simply Wall St does not have a position in the stock mentioned.