Mobile Telecommunications Company Saudi Arabia (TADAWUL:7030) Shares Could Be 27% Above Their Intrinsic Value Estimate

In this article we are going to estimate the intrinsic value of Mobile Telecommunications Company Saudi Arabia (TADAWUL:7030) by taking the expected future cash flows and discounting them to today’s value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. 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. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

Check out our latest analysis for Mobile Telecommunications Company Saudi Arabia

Is Mobile Telecommunications Company Saudi Arabia Fairly Valued?

We’re using the 2-stage growth model, which simply means we take into account two stages of the 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. 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

2023 2024 2025 2026 2027 2028 2029 2030 2031 2032
Leveraged FCF (SAR, Millions) ر.س649.0m ر.س705.0m ر.س557.0m ر.س543.7m ر.س549.1m ر.س567.5m ر.س596.0m ر.س632.7m ر.س676.9m ر.س727.9m
Growth Rate Estimate Source Analyst x1 Analyst x1 Analyst x1 Est @ -2.39% Est @ 0.99% Est @ 3.35% Est @ 5.01% Est @ 6.17% Est @ 6.98% Est @ 7.55%
Present Value (SAR, Millions) Discounted @ 14% р.с569 р.с542 р.с375 р.с321 р.с285 р.с258 р.с237 р.с221 р.с207 р.с195

(“Est” = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ر.س3.2b

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 8.9%. We discount the terminal cash flows to today’s value at a cost of equity of 14%.

Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = р.с728m× (1 + 8.9%) ÷ (14%– 8.9%) = р.с15b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= ر.س15b÷ ( 1 + 14%)10= ر.س4.1b

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is р.с7.3b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of Rs.10.4, the company appears slightly overvalued at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula – garbage in, garbage out.

dcf
SASE:7030 Discounted Cash Flow January 3rd 2023

The Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. Part of investing is coming up with your own evaluation of a company’s future performance, so try the calculation yourself and check your own 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 Mobile Telecommunications Company Saudi Arabia 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 14%, 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.

SWOT Analysis for Mobile Telecommunications Company Saudi Arabia

Strength
  • Earnings growth over the past year exceeded the industry.
  • Debt is well covered by cash flow.
Weakness
  • Interest payments on debt are not well covered.
  • Expensive based on P/E ratio and estimated fair value.
Opportunity
  • Annual earnings are forecast to grow faster than the Saudi market.
Threat
  • 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 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. 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. Can we work out why the company is trading at a premium to intrinsic value? For Mobile Telecommunications Company Saudi Arabia, there are three essential items you should explore:

  1. Risks: Case in point, we’ve spotted 1 warning sign for Mobile Telecommunications Company Saudi Arabia you should be aware of.
  2. Future Earnings: How does 7030’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. Simply Wall St updates its DCF calculation for every Saudi stock every day, so if you want to find the intrinsic value of any other stock just search here.

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

Find out whether Mobile Telecommunications Company Saudi Arabia is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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 into account 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.

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