Are investors undervaluing Emirates Integrated Telecommunications Company PJSC (DFM:DU) by 37%?

How far is Emirates Integrated Telecommunications Company PJSC (DFM:DU) from its intrinsic value? Using the most recent financial data, we will examine whether the stock price is fair by estimating the company’s future cash flows and discounting them to their present value. This will be done using the discounted cash flow (DCF) model. This may sound complicated, but it’s actually quite simple!

We draw your attention to the fact that there are many ways to value a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. For those who are passionate about stock analysis, the Simply Wall St analysis template here may interest you.

See our latest analysis for Emirates Integrated Telecommunications Company PJSC

The calculation

We use what is called a 2-stage model, which simply means that we have two different periods of company cash flow growth rates. Generally, the first stage is a higher growth phase and the second stage is a lower growth phase. To start, we need to estimate the cash flows for the next ten years. Wherever possible, we use analysts’ estimates, but where these are not available, we extrapolate the previous free cash flow (FCF) from the latest estimate or reported value. We assume that companies with decreasing free cash flow will slow their rate of contraction and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow more in early years than in later years.

Generally, we assume that a dollar today is worth more than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at an estimate of present value:

10-Year Free Cash Flow (FCF) Forecast

2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Leveraged FCF (AED, Millions) Ï.å1.02b Ï.å1.33b Ï.å1.91b Ï.å2.17b Ï.å2.45b Ï.å2.73b Ï.å3.02b Ï.å3.33b Ï.å3.66b Ï.å4.00b
Growth rate estimate Source Analyst x1 Analyst x2 Analyst x1 Is at 14.11% Is at 12.56% Is at 11.48% Is at 10.73% Is at 10.2% Is at 9.83% Is at 9.57%
Present value (AED, millions) discounted at 13% د.إ902 د.إ1.0k د.إ1.3k د.إ1.3k د.إ1.3k د.إ1.3k د.إ1.3k د.إ1.3k د.إ1.2k د.إ1.2k

10-year discounted cash flow (PVCF) = Ï.å12b

We now need to calculate the terminal value, which represents all future cash flows after this ten-year period. The Gordon Growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average 10-year government bond yield of 9.0%. We discount terminal cash flows to present value at a cost of equity of 13%.

Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = Ï.å4.0b× (1 + 9.0%) ÷ (13%– 9.0%) = ï.å115b

Present value of terminal value (PVTV)= TV / (1 + r)ten= Ï.å115b÷ ( 1 + 13%)ten= Ï.Å35b

The total value, or equity value, is then the sum of the present value of future cash flows, which in this case is د.إ47b. To get the intrinsic value per share, we divide it by the total number of shares outstanding. Compared to the current share price of د.إ6.6, the company seems to have a pretty good value with a 37% discount to the current share price. The assumptions of any calculation have a big impact on the valuation, so it’s best to consider this as a rough estimate, not accurate down to the last penny.

DFM: Discounted Cash Flow FROM March 1, 2022

The hypotheses

We emphasize 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 entries, I recommend that you redo the calculations yourself and play around with them. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we consider Emirates Integrated Telecommunications Company PJSC 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 takes debt into account . In this calculation, we used 13%, which is based on a leveraged beta of 0.800. Beta is a measure of a stock’s volatility relative to the market as a whole. We derive our beta from the average industry beta of broadly comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.

Let’s move on :

Although important, the DCF calculation is just one of many factors you need to assess for a business. The DCF model is not a perfect stock valuation tool. Preferably, you would apply different cases and assumptions and see their impact on the valuation of the business. For example, if the terminal value growth rate is adjusted slightly, it can significantly change the overall result. Can we understand why the company is trading at a discount to its intrinsic value? For Emirates Integrated Telecommunications Company PJSC, there are three important things you should dig into:

  1. Financial health: Does DU have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors such as leverage and risk.
  2. Future earnings: How does DU’s growth rate compare to its peers and the market in general? Dive deeper into the analyst consensus figure for the coming years by interacting with our free analyst growth forecast chart.
  3. Other strong companies: Low debt, high returns on equity and good past performance are essential to a strong business. Why not explore our interactive list of stocks with strong trading fundamentals to see if there are any other companies you may not have considered!

PS. Simply Wall St updates its DCF calculation for every UAE stock daily, so if you want to find the intrinsic value of any other stock, just search here.


Sean B. Jackson