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We will use the Discounted Cash Flow (DCF) model to estimate the intrinsic value of Al Yah Satellite Communication Company PJSC (ADX:YAHSAT) by projecting its future cash flows and discounting them to today’s value.

We employ the 2-stage growth model, taking into account two stages of the company’s growth. The initial period is expected to have a higher growth rate, while the second stage is assumed to have a stable growth rate.

To estimate the next ten years of cash flows, we use analyst estimates when available. Otherwise, we extrapolate the previous free cash flow (FCF) or reported value. We assume that companies with shrinking free cash flow will slow their rate of shrinkage, while companies with growing free cash flow will see their growth rate slow over the period. This reflects the tendency for growth to slow more in the early years than in later years.

To calculate the present value of these future cash flows, we discount them to their estimated value in today’s dollars. We assume that a dollar today is more valuable than a dollar in the future. The discounted cash flows for the next ten years amount to .3 billion.

The second stage, known as Terminal Value, represents the company’s cash flow after the first stage. We use the Gordon Growth formula to calculate the Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield. Discounting the terminal cash flows at a cost of equity of 14%, we arrive at a Terminal Value of .0 billion.

The total equity value is the sum of the present value of the future cash flows and the Terminal Value, which in this case is .2 billion. Dividing by the number of shares outstanding, we find that the company appears undervalued at a 47% discount to the current stock price.

It is important to note that the assumptions made in the calculation have a significant impact on the valuation. Therefore, this should be viewed as a rough estimate rather than a precise figure.

The discounted cash flow analysis does not consider the cyclicality of an industry or a company’s future capital requirements. Additionally, the cost of equity is used as the discount rate instead of the cost of capital, as we are considering Al Yah Satellite Communication Company PJSC as potential shareholders.

In conclusion, while valuation is an important aspect of investment analysis, it shouldn’t be the only metric considered. DCF models are useful for testing assumptions and theories to determine if a company is undervalued or overvalued. Further research is necessary to understand why the company is trading at a discount to its intrinsic value.

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