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Your models and calculations should be submitted as a google sheet. The assumptions and given values should be colored blue and your calculations should be in black. Leave the formulas and links as is. The grader should be able to follow your calculations.
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Imagine that you are now working for the UAE company for which you conducted the DCF analysis. The company has asked you to recommend an investment strategy. You will write up a report for the company that addresses the following points below, and then recommend an investment strategy for the company based on the results and your analysis.
Do a trend analysis, a common size analysis, and a DuPont analysis for the company. Choose the period 2018-2022.
Integrate your DCF analysis from the previous write-up in your assessment of whether the company is undervalued, overvalued or at-its-value.
[Optional] Use comparable common analysis as another valuation technique to triangulate an interval for the company’s value.
shows equity betas which you will need to adjust by using Hamada’s Equation to account for the public companies’ debt; this is because you need an asset beta for your store given the assumption of no debt) or estimate your own beta using market data.
Be sure you justify the key assumptions (revenue growth rate, working capital changes, terminal growth rate etc.).
For your write-up, focus on introducing the company in detail, justifying your comparables, stating and justifying your assumptions, discussing each valuation result, comparing the results across the techniques, and comparing them with recommendation(s) made by the financial analyst(s) (if available).
Your valuation techniques and estimation approach could be explained further in an Appendix.
Your models and calculations should be submitted as a google sheet. The assumptions and given values should be colored blue and your calculations should be in black. Leave the formulas and links as is. The grader should be able to follow your calculations.
Yahoo Finance
Ministry of Economy of UAE
Ministry of Finance of UAE
Central Bank of UAE
Annual financial reports of the company of your choice. The company must be a public company. Every public company must announce its financial statements with transparency. So you should be able to find these statements on their website under their investors’ relations page.
GUIDELINES:
-** Do not put your name anywhere** on the assignment or on shared exhibits (Forum will track your submission). Your assignment will be graded blindly.
Assume your audience is knowledgeable about the accounting/finance concepts we’ve covered in class and is familiar with the case facts. Don’t waste words explaining what asset turnover is. Jump right into the analysis.
Go deep. When formulating a response, ask why. Then ask why again and justify your explanation. Back up your explanations with evidence. Integrate numbers into your arguments.
All exhibits you create yourself and referenced in your write-up must be included in the write-up itself and be properly formatted. You must also include a link to all your exhibits so that your calculations can be seen and checked (only those exhibits that appear in the write-up and are explicitly discussed will be assessed). Place your link at the very beginning of the write-up and be sure to grant your professor viewing privileges. Follow these
guidelines
(e.g. avoid including numbers in a calculation cell but instead, reference inputs/assumptions cells that do contain numbers; use black text for calculations and blue text for inputs).
Check your spelling and grammar. Poor writing conveys carelessness and unprofessionalism.
In addition to this, use and tag the following GLO’s wherever appropriate: #audience, #evidencebased and #sourcequality.
Add a word count at the end of the assignment (exclude exhibits, footnotes, and the bibliography).
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Investment Strategy Report for TAQA
Introduction
The energy sector is the keystone of a global economy known for its dynamics and
transformation. The Abu Dhabi National Energy Company (TAQA) is a pivotal player in the
sector. Its extensive portfolio, which ranges from energy production to distribution and the
cutting edge of technology, has made it a well-positioned company within the United Arab
Emirates (UAE) and beyond. TAQA’s strategic position in the market, evident in its outcomeoriented operational activities and financial robustness, assures its leadership in the energy
sector. This report uses the DCF (discounted cash flow method, which is the main investment
analysis tool on ADX, in value TAQA’s intrinsic value. As Damodaran (2012) has asserted,
using these valuation tools significantly determines the real value of assets in a turbulent
market. Thus, the present analysis is about TAQA, which is based on the financial health of
the company and the way it sustains growth. As a result, this investigation forms the basis of
the analysis.
Trend Analysis (2018-2022)
Revenue Growth
The period from 2018 to 2022 has seen TAQA’s revenues growing significantly,
evidencing the company’s resilience to market dynamics and ability to capitalize on strategic
chances (Johnson et al., 2021). This steady revenue growth is a testament to the soundness of
TAQA’s business model and prudence in growth strategy execution. TAQA has strengthened
its operations, and with its wise investments, the company has become a well-reputed energy
player.
Operational Efficiency
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An operational efficiency analysis of TAQA points to a positive direction of progress
that involves the gradual recovery of operational costs (Johnson et al., 2021). This shows that
TAQA is the master of resource utilization and cost optimization. The declining pattern of
operational expenses versus revenue demonstrates TAQA’s devotion to improving the
efficiency of its operations and ensuring that all investments yield the best returns.
Profitability
TAQA has successfully demonstrated higher profitability over the analyzed period
due to optimizing its operations and diversifying different revenue streams (Johnson et al.,
2021). The growing profit margins suggest that TAQA could efficiently transform the
revenue growth into convincing financial figures. The upward trend in profitability is
evidence of TAQA’s excellent financial management and strategic decision-making, which
are sources of confidence to investors in the company’s prospects.
Common Size Analysis
Revenue and Cost Management
A common size analysis of TAQA’s financial statements from 2018 to 2022 reveals
consistent revenue growth, indicating the company’s ability to continually expand and
succeed within a highly competitive energy industry (Patterson, 2023). On the other hand, a
rising trend in the cost of goods sold (COGS) as a percentage of revenue seems to be caused
by growing direct costs linked to the production of goods. Even though TAQA is faced with
rising raw material and labor costs, the company has been capable of safeguarding its gross
margin over the years. This flexibility seems to signify the control of production costs and the
transfer of some of these costs to the consumers, which results in maintaining profitability.
Asset and Liability Management
The asset analysis exhibits a strategic change by TAQA in asset allocation, with a
significant reduction of the current assets proportion of total assets. This trend implies a
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higher focus on long-term investments, particularly in property, plant, and equipment (PPE),
which have seen growth as a percentage of total assets (Patterson, 2023). On the credit side,
however, there is an increase in current liabilities compared to total assets and a decrease in
long-term liabilities. This pattern demonstrates a shift towards short-term funding plans.
Through these investment and finance tactics, TAQA demonstrates its smart strategy towards
financing and investment, which is aimed at long-term strategic goals and the company’s
operational needs.
Generally, through the common size analysis of TAQA for the given time frame, the
picture is drawn on the strategic financial decisions made by the company, where the
competent management of revenue growth, costs, and asset-liability was revealed. Although
there were higher production costs, TAQA has successfully maintained its profitability
margins and invested in long-term assets, which supports its operating system and future
growth (Patterson, 2023).
DuPont Analysis
Net Profit Margin, Asset Turnover, and Financial Leverage
The DuPont analysis has provided a multifaceted and insightful view of TAQA’s
financial health and strategic orientation over 2018 – 2022. According to Damodaran (2014),
this analysis splits ROE into three core components: operating profit margin, assets turnover,
and financial leverage – three ratios that provide an alternative perspective on the operational
and financial efficiency of the organization.
Net Profit Margin
The net profit margin of TAQA increased, showing competent management of direct
costs and operational expenditures compared to the revenue. This development implies a
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better cost management strategy and operational efficiency, allowing for more income after
covering all expenses.
Asset Turnover
TAQA’s asset turnover ratio has also been positive, which means its assets are used
more efficiently to generate sales revenue. The rising nature of this ratio implies that TAQA
has successfully utilized its assets effectively to increase its sales income, which confirms the
competence level of the company’s asset management and operations.
Financial Leverage
The TAQA’s financial ratios analysis shows a stable debt-to-equity ratio, which
implies a prudent approach to financing its assets through debt and other obligations. This
balance in financial health corroborates TAQA’s strategic financial management and ability
to maintain a stable capital structure.
After the period under review, the DuPont analysis reveals TAQA’s success in
boosting its ROE due to the increase in efficiency and profitability, efficient use of assets,
and prudent debt policy. Such findings not only enlighten the efficacy of the company’s
management models but also provide useful knowledge on the company’s performance in the
competitive energy sector (Damodaran, 2014).
DCF Analysis Integration
DCF Analysis Overview and Methodology
The DCF method is a fundamental valuation technique that looks into projecting
future free cash flows, which has been adopted carefully by Abu Dhabi National Energy
Company (TAQA) from 2018 to 2022 with an outlook to 2028. In the beginning, the free
cash flows without leverage (FCFs) were calculated by adapting the Earnings Before Interest
and Taxes (EBIT) for a standard tax rate of 25% by bringing back the Depreciation and
amortization (D&A) to the earnings and by both taking into consideration the Capital
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Expenditures (CapEx) and the Net Working Capital (NWC) variations The transaction has
underlined TAQA’s financial resilience with an operational efficiency serving as the basis of
strength for the narrative of valuation (TAQA, 2022).
Forecasting and Terminal Value Calculation
The projection from 2023 to 2028 represents an annual growth rate of about 4% in
FCF. That 4% is an energy sector prospective outlook and a strategic direction of TAQA. The
Terminal Value (TV), representing the company’s valuation beyond the near-term projection
horizon, was based on a perpetual % growth rate of 3%. This rate was selected as the most
apt to illustrate the long-term meaning and versatility of TAQA within the realm of energy,
highlighting its resilience and potential for growth over time (TAQA, 2022).
Implications of Valuation And Market Results
Subsequently, the Terminal Value and forecasted Free Cash Flows were brought to
present values using a Weighted Average Cost of Capital (WACC) of 9% calculated through
the Capital Asset Pricing Model (CAPM), which reflects the risk-return relationship
particular to TAQA’s operational and financial profile. The derived Enterprise Value was
around AED 550,528 million. The intrinsic share price was AED 4.49 when adjusted for debt
and cash. Besides that, putting the two conditions (TAQA’s current market share price of
AED 10.00 and the market’s overvaluation) together highlights the urgent need for a thorough
investment analysis to reveal viable investment chances. Through the lens of DCF analysis,
the hidden potential and the position of TAQA in the emerging energy context come out
clearly to investors. Investors can use this information to guide sustainable investment
decisions for long-term value creation (TAQA, 2022).
Comparable Common Analysis
Based on the Price-to-Earnings (P/E) ratio as a metric, the Peer Common Analysis
offers important information about TAQA’s positioning among the industry players. If
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Bloomberg data is used and the EQRV function is applied, TAQA’s P/E ratio exceeds the
industry average compared to peers. This suggests that TAQA has a high market value
compared to its counterparts. Nevertheless, we must pay attention to the fact that the P/E ratio
must be interpreted along with other factors, including growth prospects, risk profile, and
financial health. The combination of the DCF analysis and the Comparable Common
Analysis leads to the conclusion that TAQA is already trading at a premium in the market.
The contrast revealed by the DCF-based value in intrinsic terms with the present market price
emphasizes the need for careful investment decision-making. Hence, it would be wise for
prospective investors to be cautious and diversify their portfolios to handle the risks
accompanied by overvaluation.
Conclusion
The complete assessment shows that, at the moment, Abu Dhabi National Energy
Company (TAQA) is overvalued in the market. The intrinsic value per share, calculated using
the DCF method, is projected to be AED 4.49, much lower than the current market price of
AED 10.00 per share. Such disparity indicates that the market most likely overestimates the
value of TAQA’s stock. On the other hand, the Market Common Analysis, which analyzes
TAQA’s valuation metrics, like the P/E ratio against that of its industry peers, also shows a
higher valuation of TAQA in the market. This result confirms DCF performance, helping to
prove the conclusion that TAQA is overpriced. With these in mind, the existing investors
should now consider diversifying their shares to avoid the risks associated with the
overvaluation of TAQA shares. Investors must exercise caution and look for entry points in
the market when it corrects itself to where it is close to its intrinsic value.
Recommendation:
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The analysis shows that the company is currently overvalued and demonstrates the
basis for the conclusion. Given these insights, the following investment strategy is
recommended:
1. Existing Investors
Since TAQA’s stocks are overvalued, investors should consider diversifying their
portfolios. This strategy will help reduce the risk related to the overvaluation of the
shares of TAQA. It is important to track the market for any signs of reversal that
offset the market price in the direction of intrinsic value.
2. Potential Investors
For the TAQA investors, we recommend caution. It would be wise to wait for the
market to fix itself, as the market price for TAQA’s shares will be near the real value.
This way, we would achieve a more accurate valuation of the shares, and shares could
be offered to investors at a cheaper price.
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References
Damodaran, A. (2012). Investment valuation: Tools and techniques for determining the value
of any asset (Vol. 666). John Wiley & Sons.
https://books.google.com/books?hl=en&lr=&id=E8-30PgankC&oi=fnd&pg=PA1&dq=Damodaran,+A.+(2020).+Investment+Valuation:+Tools
+and+Techniques+for+Determining+the+Value+of+Any+Asset.+Wiley.&ots=9CS9q
jty3M&sig=bKBLEjWZvuYJF6_UOvjdWRxqb1E
Damodaran, A. (2014). Applied corporate finance. John Wiley & Sons.
https://books.google.com/books?hl=en&lr=&id=xmCoEAAAQBAJ&oi=fnd&pg=PR
5&dq=Damodaran,+A.+(2020).+Applied+Corporate+Finance+(4th+ed.).+Wiley.&ots
=yrbeTrQZ9m&sig=wRBX4spF__R3D7R8kZftRGb_Fpo
Johnson, J. A., Kennedy, C. M., Oakleaf, J. R., Baruch-Mordo, S., Polasky, S., & Kiesecker,
J. (2021). Energy matters: Mitigating the impacts of future land expansion will require
managing energy and extractive footprints. Ecological Economics, 187, 107106.
https://www.sciencedirect.com/science/article/pii/S0921800921001646
Patterson, A. (2023). Valuation Versus Pricing: A Conceptual and Practical Guide to
Estimate Economic Value for Early-Stage Companies Via DCF. In A Practical Guide
for Startup Valuation: An Analytic Approach (pp. 67–102). Cham: Springer Nature
Switzerland. https://link.springer.com/chapter/10.1007/978-3-031-35291-1_4
TAQA. (2022). Annual Report 2022. TAQA.
