Estimated fair value of Jahez International Company for Information Systems Technology (TADAWUL:9526)

What is the distance between Jahez International Company for Information Systems Technology (TADAWUL:9526) and its intrinsic value? Using the most recent financial data, we will examine whether the stock price is fair by projecting its future cash flows and then discounting them to the present value. One way to do this is to use the discounted cash flow (DCF) model. Believe it or not, it’s not too hard to follow, as you’ll see in our example!

We generally believe that the value of a company is the present value of all the cash it will generate in the future. However, a DCF is just one of many evaluation metrics, and it is not without its flaws. If you want to know more about discounted cash flow, the rationale for this calculation can be read in detail in the Simply Wall St analysis template.

Check out our latest analysis for Jahez International Company for Information Systems Technology

Is Jahez International Company for Information Systems Technology fairly valued?

We use the 2-stage growth model, which simply means that we consider two stages of business growth. In the initial period, the company may have a higher growth rate, and the second stage is generally assumed to have a stable growth rate. In the first step, we need to estimate the company’s cash flow over 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 (SAR, Millions) ر.س240.0m ر.س377.0m ر.س504.0m ر.س571.0m ر.س632.2m ر.س696.6m ر.س765.1m ر.س838.2m ر.س916.9m ر.س1.00b
Growth rate estimate Source Analyst x1 Analyst x1 Analyst x1 Analyst x1 Is at 10.72% Is at 10.19% Is at 9.82% Is at 9.56% Is at 9.38% Is at 9.26%
Present value (SAR, millions) discounted at 14% ر.س210 ر.س289 ر.س339 ر.س337 ر.س327 ر.س315 ر.س303 ر.س291 ر.س279 ر.س267

(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = ر.س3.0b

We now need to calculate the terminal value, which represents all future cash flows after this ten-year period. For a number of reasons, a very conservative growth rate is used which cannot exceed that of a country’s GDP growth. In this case, we used the 5-year average of the 10-year government bond yield (9.0%) to estimate future growth. Similar to the 10-year “growth” period, we discount future cash flows to present value, using a cost of equity of 14%.

Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = ر.س1.0b × (1 + 9.0%) ÷ (14%– 9.0%) = ر.س21b

Present value of terminal value (PVTV)= TV / (1 + r)ten= ر.س21b÷ ( 1 + 14%)ten= ر.س5.6b

The total value is the sum of the cash flows for the next ten years plus the present terminal value, which gives the total equity value, which in this case is ر.س8.6b. The final step is to divide the equity value by the number of shares outstanding. Compared to the current share price of ر.س974, the company appears around fair value at the time of writing. 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.

SASE: 9526 Discounted cash flow June 5, 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. Part of investing is coming up with your own assessment of a company’s future performance, so try the math yourself and check your own assumptions. The DCF also does not take into account the possible cyclicality of an industry, nor the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we consider Jahez International Company for Information Systems Technology 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 into account the debt. In this calculation, we used 14%, which is based on a leveraged beta of 1.045. 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 :

While important, the DCF calculation will ideally not be the only piece of analysis you look at for a business. The DCF model is not a perfect stock valuation tool. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. If a company grows at a different pace, or if its cost of equity or risk-free rate changes sharply, output may be very different. For Jahez International Company for Information Systems Technology, we have put together three essential aspects that you should assess:

  1. Risks: Take risks, for example – Jahez International Company for Information Systems Technology has 1 warning sign we think you should know.
  2. Future earnings: How does the growth rate of 9526 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. The Simply Wall St app performs a discounted cash flow valuation for each stock on the SASE every day. If you want to find the calculation for other stocks, search here.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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