YPF Sociedad Anonima (NYSE:YPF): Undervalued Argentinian Energy

Tobias CarlisleStocksLeave a Comment

YPF Sociedad Anonima (NYSE:YPF), the Argentinian energy company, has been beaten up over the last month, making it the fifth cheapest stock in the Large Cap Screener with an acquirer’s multiple of 6.87. It has a $10.2 billion market cap, a $15.4 billion enterprise value, and generated $2.3 billion in operating income TTM. At the current price, you can get it at a discount to George Soros, who has a $320M stake, purchased at an average price of $27.31 per share.

Macro investor  think it has a fair value north of $40:

Summary

  • Downstream operations drive YPF’s value for investors more than upstream exploration activity or international energy prices.
  • A historical perspective gives comfort that post expropriation, YPF should benefit from its “national champion” status.
  • Major institutional shareholders (the “smart” money) are holding or adding to their positions.
  • YPF is a proxy for the overall Argentine economy. As economic conditions in Argentina stabilize and improve, the impact on YPF’s share value should be positive.
  • My valuation model suggests a fair value share price of $40.38, making YPF an undervalued opportunity with room for growth surprise.

Here’s his valuation:

Valuation
So the big question becomes, considering all the factors previously described, what is the stock worth? My financial model of the company makes projections for the key revenue drivers across the major product lines as well as costs, tax and other key income statement items. I use a discounted forward market multiple approach to valuation based on earnings-per-share calculations. The model projects a base case scenario predicated on slow revenue growth, steady margins and a modestly improving macro environment. It also makes projections for a bullish case in which the economic backdrop and company activity progress more favorably (but realistically) and a bearish case where the opposite is true. I then assign probabilities to these three cases to arrive at a weighted valuation average. I use a 10% discount rate as a required rate of return.The estimates for revenue drivers, costs, inflation, exchange rate and industry market multiples come from a mosaic of opinions of international groups (like the World Bank), local independent economic consultants, Wall Street analysts, rating agencies, company guidance and my own estimations.The table below highlights some of the key values currently in the model:

 

Weighted Average of all scenarios*
2014 2105f 2016f 2017f
Revenues** (millions of ARS) 141,942 202,082 279,002 376,694
Net Income (millions of ARS) 9,002 10,513 13,590 17,498
EPS (ARS) 22.95 26.81 34.66 44.62
EPS (USD) 2.789 2.92 3.18 3.69
Company Earnings Multiple 11.11 12.45 13.25 14.05
Inflation (unofficial) 35.00% 29.8% 25.5% 22.5%
Exchange Rate (official) 8.23 9.23 11.03 12.35
Fair Price 30.99 36.51 42.48 52.48
Discounted Fair Value today: USD40.38

*A Base scenario (50%), Bull scenario (30%) and Bear scenario (20%)

**Rolled-up from product-level projections

In the end, the model suggests YPF ADR shares would be fairly valued at US$40.38, suggesting a 30% undervaluation at the time of this writing.

At the $26.28 price at the time of writing, $40 represents a 65 percent upside.

Read more: YPF: The Once And Future Champion Of Argentina’s Energy Sector – YPF Sociedad Anonima (NYSE:YPF) | Seeking Alpha

For more articles like this, check out our value investing news here.

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