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Financial Statement Analysis - TAQA

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Financial Statement Analysis - TAQA

  1. 1. ABU DHABI NATIONAL ENERGY COMPANYFINANCIAL STATEMENT ANALYSIS AND STOCK VALUATION DANIAL MUNSOOR JULY 2011
  2. 2. Danial MunsoorFIN924 REPORT 3259882 Table of Contents1. BUSINESS ANALYSIS.................................................................................................. 3 1.1 Company Overview................................................................................................. 3 1.2 TAQA’s Strategy Analysis ....................................................................................... 4 1.3 Competitive Analysis ............................................................................................... 4 1.4 Technology at TAQA............................................................................................... 5 1.5 Management at TAQA ............................................................................................ 5 1.6 TAQA’s Price Chart................................................................................................. 62. ASSET BASED VALUATION ........................................................................................ 63. MULTIPLES ANALYSIS ................................................................................................ 84. WEIGHTED AVERAGE COST OF CAPITAL (WACC) .................................................. 95. DISCOUNTED CASH FLOW MODEL ......................................................................... 106. RESIDUAL EARNINGS MODEL ................................................................................. 117. CONCLUSION ............................................................................................................. 128. RECOMMENDATION .................................................................................................. 129. REFERENCES ............................................................................................................ 13Abu Dhabi National Energy Company Page 2
  3. 3. Danial MunsoorFIN924 REPORT 3259882 Abu Dhabi National Energy CompanyTicker: TAQA:UH (Bloomberg) July 2011Listing: Abu Dhabi Securities ExchangeCurrent Price: AED 1.27 (as-at 12th June, 2011) SELL1. BUSINESS ANALYSIS: 1.1 Company Overview: Abu Dhabi National Energy Company (a.k.a TAQA) was incorporated in 2005 along with Abu Dhabi Water and Electricity Authority (ADEWA) being the founder shareholder, holding a 51% share (TAQA Annual Report, 2010). It was in the year 2007 that TAQA, through a number of “acquisitions”, transformed from a domestic power generation and desalination company into a global energy company (TAQA Annual Report, 2010). The company’s current portfolio comprises of: Downstream Operations – comprises of power generation and water desalination. TAQA provides 90% of the water and electricity requirements for its home market (i.e. Abu Dhabi). The company also has facilities in Ghana, India, Morocco and Saudi Arabia (Global Investment House Annual Report, 2008) Midstream Operations – comprises of two gas storage facilities, One in Netherlands and the other in Canada. Upstream Operations – comprises of four oil fields off the western coast of the Netherlands with a presence in the UK North Sea. TAQA also has upstream operations in North America (Global Investment House Annual Report, 2008). TAQA has six subsidiaries and has a 90% interest in each of them. The remaining 10% is owned by ADEWA. With its holdings in these subsidiaries, TAQA owns 84% of Abu Dhabi’s power generation capacity and about 90% ofAbu Dhabi National Energy Company Page 3
  4. 4. Danial MunsoorFIN924 REPORT 3259882 the UAE’s water desalination capacity (Global Investment House Annual Report, 2007).1.2 TAQA’s Strategy Analysis: The company believes in creating “value” and it removes assets from its portfolio which do not add to this vision (TAQA Annual Report, 2010). TAQA intends to grow via sustainable long-term projects like Bergermeer Gas Storage and the expansion of the Jorf Lasfar power plant leverage. It believes that, if business skills and knowledge are combined together with the portfolio of assets, it would create significant growth opportunities for TAQA which would in turn generate larger returns for the shareholders (Annual Report, 2010). In addition to the above mentioned strategies, TAQA also grows through targeted acquisitions within its core geographies. On 1st November 2010, it acquired Al Wahda Capital Investment LLC which was a privately owned UAE company (TAQA Annual Report, 2010).1.3 Competitive Analysis: To evaluate the competitiveness of the industry and TAQA’s current position in the sector, a SWOT Analysis has been performed below which highlights the core Strengths/Opportunities and Threat/Weaknesses for TAQA: Strengths/Opportunities Abu Dhabi has the largest power capacity in the UAE and UAE has the second largest capacity among the “GCC countries”. It accounts to almost 25% of the GCC region’s total power capacity. TAQA has the largest assets for power generation and desalination water in the UAE (TAQA Annual Report, 2010). Around 84% of the total installed capacity base in Abu Dhabi is owned by TAQA’s power capacity (Global Investment House Annual Report, 2007).Abu Dhabi National Energy Company Page 4
  5. 5. Danial MunsoorFIN924 REPORT 3259882 Weaknesses /Threats The company is largely dependent upon ADWEC who is the major shareholder and also the major customer for water as well as power (TAQA Annual Report, 2010). TAQA being a single entity is looking after its significant operations around the globe (TAQA Annual Report, 2010). Since the company is involved cross border operations and derivatives transactions, it encounters risks such as Interest Rate Risk, Currency Risk, Credit Risk, Market Risk and Commodity Risk (TAQA Annual Report, 2010). ADWEC might impose restrictions or regulations on power generation and water desalination which can adversely affect TAQA’s profits (Global Investment House Annual Report, 2007).1.4 Technology at TAQA: TAQA’s Oil and Gas operations require a very sophisticated technology if it wants to meet its objectives. This is the reason that TAQA tries to identify technology so that it has a competitive edge and can remain innovative within the industry (TAQA Annual report, 2010).1.5 Management at TAQA: TAQA pays strong emphasis on maintaining the best standards of “Corporate Governance”. TAQA’s Board of Directors contains a minimum of 4 and a maximum of 9 directors who are appointed by the shareholders for a three year period (TAQA Annual Report, 2010) Currently, the Board has two committees which are as follows: Audit Committee Remuneration Committee TAQA was audited by Ernst & Young in the year 2010 which means that the figures provided in the Financial Statements are free from any sort of discrepancies.Abu Dhabi National Energy Company Page 5
  6. 6. Danial MunsoorFIN924 REPORT 32598821.6 TAQA’s Price Chart: To develop a better understanding of TAQA’s stock price, a Price Chart has been shown below which lists all the important information that is required by an investor: Volume 71,495 Outstanding Shares 6,225,000,000 Previous Close AED 1.46 Market Cap 9,213,000,000 Last Price AED 1.48 Trade Time 30/12/2010 Open AED 1.48 P/E (ttm) 8.7x Day High AED 1.48 EPS (ttm) 0.17 Day Low AED 1.45 Dividend & Yield AED 0.10/share (8.33%) Change +0.02 (1.37%) th (The amounts shown above have been taken as-at 30 December, 2010 from Abu Dhabi Securities Exchange) (Source: Abu Dhabi Securities Exchange, 2010)2. ASSET BASED VALUATION: We can use Asset Based Valuation to obtain Firm’s Value by firstly estimating a Value of Assets. We can then calculate Value of Equity by subtracting the Value of Debt from the Value of Assets (Penman, 2010). In short, the following equation can be used: Generally, some assets and liabilities are carried at the Market Value. However, liabilities are assumed to be closer to the market value. Moreover, the Debt andAbu Dhabi National Energy Company Page 6
  7. 7. Danial MunsoorFIN924 REPORT 3259882 Equity investments are carried at the Fair Value. In case of TAQA, all values in the consolidated statements are carried at the historical costs (i.e. book values) except the Sale Investments and Derivative Financial Instruments. However there are some assets and liabilities which have been taken at the fair value. The Value of the Firm has been calculated as follows: Market Value of Equity: AED AED Number of shares traded (in millions) 6,225 6,225 Price per share (as at 30th Dec10) 1.48 1.19 MV of Equity (in millions) 9,213 7,407.75 Book Value of Net Debt: Interest bearing loans and borrowings (in millions) 74,913 60,543 Islamic loans (in millions) 1,906 2,014 Less: cash and cash equivalents (in millions) -5489 -4282 BV of Net debt (in millions) - assumed BV=MV 71,330 58,275 (Includes both LT and ST Interest Bearing Debt - as per the notes in the Report) Enterprise Market Value/Market Value of Firm: MV of Equity (in millions) 9,213 7,407.75 MV of Net Debt (in millions) 71,330 58,275 Enterprise Market Value (in millions) 80,543 65,682.75 The Enterprise Market Value of AED 80,543 million was obtained by adding the Value of Equity and Net Debt. The Enterprise Value has increased by almost 23% compared to 2009. To have a better understanding, Book Value of Equity has also been calculated as follows: Book Value of Equity: 15,238 12,410 Less: cumulative changes in fair value of available for sale -180 13 investments (in millions) Less: cumulative changes in fair value of derivatives (in 2,822 1,190 millions) BV of Equity (in millions) 17,880 13,613 (Calculated as per the notes in the Report)Abu Dhabi National Energy Company Page 7
  8. 8. Danial MunsoorFIN924 REPORT 32598823. MULTIPLES ANALYSIS: Some of the important multiples have been calculated as follows to give a better picture about the company: S.No. Multiples 2010 2009 1 Earnings Per Share (EPS): NP attributable to common share holders (in millions) 1,019 182 Average number of shares outstanding (in millions) 6,066 6,130 EPS 0.17 0.03 2 Price to Earnings Ratio (P/E): Price per share (as at 30th Dec10) 1.48 1.19 EPS 0.17 0.03 P/E Ratio 8.71 39.67 3 Price to Book Ratio (P/B): MV of Equity (in millions) 9,213 7,407.75 BV of Equity (in millions) 17,880 13,613 P/B Ratio 0.52 0.54 4 Unlevered Price to Sales Ratio (P/S): MV of Equity (in millions) 9,213 7,407.75 MV of Net Debt (in millions) 71,330 58,275 Sales (in millions) 21,401 16,855 Unlevered P/S Ratio 3.76 3.90 5 Enterprise P/B Ratio: MV of Equity (in millions) 9,213 7,407.75 BV of Equity (in millions) 17,880 13,613 MV/BV of Net Debt (in millions) 71,330 58,275 Enterprise P/B Ratio 0.90 0.91 Considering the P/E and the P/B Ratio, it can be said that TAQA stock would be a good buy in 2010, as both these ratios give a low value. However, if we were in the year 2009, we would sell the stock if we were to consider the P/E as it is giving a relatively higher value of 39.67.Abu Dhabi National Energy Company Page 8
  9. 9. Danial MunsoorFIN924 REPORT 32598824. WEIGHTED AVERAGE COST OF CAPITAL (WACC): In order to calculate the WACC a Risk Free Rate of 1.64% was obtained. The 1- Month Annualized EIBOR was taken as the Risk Free Rate which was provided by the Central Bank of UAE. After obtaining the Risk Free Rate, the Annualized Market Return was calculated using the Daily Index Values of Emirates Securities Market from the year 2004 to 2010. In order to obtain the Annualized Market Return, first a Daily Average Market Return was calculated which came around 0.0349%. This return was then “annualized” using the following formula: The Annualized Market Return was calculated to be 13.39%. A Beta of 1.15 was then obtained from ‘Gulf Base Website’. One all the above data was obtained, the CAPM Model was used to calculate the Cost of Equity (re), as shown below: Capital Asset Pricing Model Beta 1.15 Risk Free Rate (1M Annualized EIBOR) 1.64% Market Risk Premium (Rm – Rf) 11.76% Cost of Equity 15.16% After obtaining the Cost of Equity, the Cost of Debt (rd) was calculated as shown below: Cost of Debt Net Debt (2009) AED 58,275 Net Debt (2010) AED 71,330 Finance Costs (2010) AED 4,003 Average Net Debt AED 64,803 Cost of Debt 6.18% After obtaining the Cost of Debt and Equity, the weights of Debt (W d) and Equity (W e) were obtained, where Wd was 0.89 and We was 0.11. Lastly the WACC was calculated using the following formula:Abu Dhabi National Energy Company Page 9
  10. 10. Danial MunsoorFIN924 REPORT 3259882 The table below summarizes the calculation of WACC: Weighted Average Cost Of Capital re 15.16% rd 6.18% wd 0.89 we 0.11 Tax Rate 38% Weighted Average Cost Of Capital (WACC) 5.126% The table values were plugged into the formula shown above and a WACC of 5.126% was obtained.5. DISCOUNTED CASH FLOW MODEL: The DCF model was “not” used because there were negative Free Cash Flows for the Investment Horizon of 5 years (i.e. from 2010 to 2015) as shown below: DISCOUNTED CASH FLOW MODEL 2010A 2011E 2012E 2013E 2014E 2015E Cash Flow from Operations 5,573 5,851.65 6,144.23 6,451.44 6,774.02 7,112.72 Cash used in Investments 7,350 7,423.50 7,497.74 7,572.71 7,648.44 7,724.92 Free Cash Flow (FCF) -1,777 -1,571.85 -1,353.50 -1,121.27 -874.42 -612.21 However, the following assumptions were made for the DCF: The Cash Flow from Operations will grow at a rate of 5%. The Cash used in Investment will grow at a rate of 4%. One of the limitations of DCF is that we cannot proceed with the model if we are getting negative free cash flows. The solution for this is to extend the investment horizon.Abu Dhabi National Energy Company Page 10
  11. 11. Danial MunsoorFIN924 REPORT 32598826. RESIDUAL EARNINGS MODEL: As per this method, we obtained a fair stock value of AED 1.08 compared to the current market price of AED 1.27/share as on 12th June, 2011. RESIDUAL EARNINGS MODEL 2010 2011E 2012E 2013E 2014E 2015E Earnings 1,019 1,069.95 1,123.45 1,179.62 1,238.60 1,300.53 (in millions) Dividends 622.5 647.40 673.30 700.23 728.24 757.37 (in millions) BV (in millions) 17,880 18,302.55 18,752.70 19,232.09 19,742.46 20,285.62 ROCE 0.059841 0.061382 0.062904 0.064403 0.065875 RE 153.42 185.26 218.36 252.76 288.53 RE (Growth) 20.75% 17.87% 15.76% 14.15% Earnings (Growth) 5.00% 5.00% 5.00% 5.00% BV (Growth) 2.36% 2.46% 2.56% 2.65% PVF (1.05126)^t 1.05126 1.105148 1.161797 1.221351 1.283958 PV (RE) 145.94 167.63 187.9 206.95 224.72 Total PV (RE) 933.19 CV (in millions) 7062.96 PV (CV) 5,782.90 Total 6,716.10 Number of Shares 6,225 (in millions) Value Per Share 1.08 However, the following assumptions were made for the Residual Earnings model: The Earnings will grow at a rate of 5%. The Dividends will grow at a rate of 4%. A Terminal growth rate of 1% has been assumed after the year 2015. WACC of 5.126% was used as the Discount Rate. The Return on Common Shareholders’ Equity (ROCE) was obtained using the following formula:Abu Dhabi National Energy Company Page 11
  12. 12. Danial MunsoorFIN924 REPORT 3259882 After obtaining the ROCE, the Residual Earnings (RE) was obtained using the following formula: The Continuing Value of AED 7,062.93 million was calculated as follows: The continuing value was then discounted using the WACC to obtain a present value of AED 5,782.91 million.7. CONCLUSION: RE model was used for calculating the stock value. On the other hand, the DCF Model was also used but due to “negative free cash flows”, the model was not considered appropriate as it would not give a normal estimate for the stock price.8. RECOMMENDATION: The stock currently trades at AED 1.27 which is 17.6% higher than the fair/calculated value of AED 1.08 given by the Residual Earnings Model. Hence it is recommended that we “SELL” the stock.Abu Dhabi National Energy Company Page 12
  13. 13. Danial MunsoorFIN924 REPORT 32598829. REFERENCES: Abu Dhabi National Energy Company (2007), “Global Research”, Menafn, [online], Available: http://www.menafn.com/updates/research_center/UAE/Equity_val/gih010207. pdf [Accessed 05/07/2011] Abu Dhabi National Energy Company (2010), ‘Annual Report 2010’, Abu Dhabi National Energy Company, [online], Available: http://www.taqa.ae/assetsmanager/files/annual_reports/index-en-2010.html [Accessed 29/06/2011] Central Bank (2011), “Home”, Central Bank. [online], Available: http://www.centralbank.ae/en/index.php [Accessed 10/07/2011] Gulf Base (2001), “Abu Dhabi National Energy Co. – TAQA”, Gulf Base, [online], Available: http://www.gulfbase.com/site/interface/CompanyProfile.aspx?c=560 [Accessed 30/06/2011] Penman,S (2010), Financial Statement Analysis and Security Valuation, (ed) Singapore, pp82 Securities and Commodities Authority (2010), ‘Historical Daily Index’, Securities and Commodities Authority,[online], Available: http://esm.sca.ae/English/Reports/Pages/historicaldailyindex.aspx [Accessed 11/07/2011]Abu Dhabi National Energy Company Page 13

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