Financial Statement Analysis - TAQA

ABU DHABI NATIONAL
ENERGY COMPANY
FINANCIAL STATEMENT ANALYSIS AND
STOCK VALUATION

DANIAL MUNSOOR
JULY 2011

Danial Munsoor
FIN924 REPORT 3259882

Table of Contents

1. 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................................................................................................. 6

2. ASSET BASED VALUATION ........................................................................................ 6

3. MULTIPLES ANALYSIS ................................................................................................ 8

4. WEIGHTED AVERAGE COST OF CAPITAL (WACC) .................................................. 9

5. DISCOUNTED CASH FLOW MODEL ......................................................................... 10

6. RESIDUAL EARNINGS MODEL ................................................................................. 11

7. CONCLUSION ............................................................................................................. 12

8. RECOMMENDATION .................................................................................................. 12

9. REFERENCES ............................................................................................................ 13

Abu Dhabi National Energy Company Page 2

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Abu Dhabi National Energy Company

Ticker: TAQA:UH (Bloomberg)
July 2011
Listing: Abu Dhabi Securities Exchange

Current Price: AED 1.27 (as-at 12th June, 2011)
SELL

1. 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% of


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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).


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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.


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1.6 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 and


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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 Dec'10) 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 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)


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3. 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 Dec'10) 1.48 1.19
EPS 0.17 0.03
P/E Ratio 8.71 39.67
3 Price to Book Ratio (P/B):
P/B Ratio 0.52 0.54
4 Unlevered Price to Sales Ratio (P/S):
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/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.


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4. 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:


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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.


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6. 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:


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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.


Danial Munsoor

9. 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]


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