What is AAV.TO's Intrinsic value?

Advantage Oil & Gas Ltd (AAV.TO) Intrinsic Value Analysis

Executive Summary

As of May 27, 2025, Advantage Oil & Gas Ltd's estimated intrinsic value ranges from $9.25 to $11.75 per share, depending on the valuation methodology applied.

Valuation Method Fair Value (USD) Implied Upside/Downside
Dividend Discount Model (Multi-Stage) $9.25 -16.8%
Earnings Power Value $11.75 +5.7%

Is Advantage Oil & Gas Ltd (AAV.TO) undervalued or overvalued?

With the current market price at $11.12, the stock appears to be fairly valued.

Understanding Intrinsic Value

Intrinsic value represents the "true" worth of a company based on its fundamentals rather than market sentiment. We've employed multiple methodologies to triangulate Advantage Oil & Gas Ltd's intrinsic value, including:

  1. Dividend Discount Model (DDM): Values the company based on expected future dividend payments
  2. Earnings Power Value (EPV): Values the company based on its current earnings power, assuming no growth

Weighted Average Cost of Capital (WACC)

The cost of capital is a critical factor in valuation models, representing the required return for investors.

WACC Component Low High
Long-term bond rate 3.2% 3.7%
Equity market risk premium 5.1% 6.1%
Adjusted beta 0.66 1.01
Cost of equity 6.5% 10.3%
Cost of debt 7.4% 11.7%
Tax rate 23.3% 24.7%
Debt/Equity ratio 0.42 0.42
After-tax WACC 6.3% 9.9%

Valuation Methods

2. Dividend Discount Model (DDM)

The DDM values a company based on its expected future dividend payments. We used two approaches:

Multi-Stage DDM:

  • Current payout ratio: 0.0%
  • Stable payout ratio: 90.0%
  • Growth transition: 5 years
  • Cost of equity: 8.4%
  • Long-term growth rate: 4.0%
  • Fair value: $9.25 (-16.8% from current price)

Stable DDM:

  • Stable payout ratio: 70% (Low) to 90% (High)
  • Cost of equity: 10.3% (Low) to 6.5% (High)
  • Long-term growth rate: 3.0% (Low) to 5.0% (High)
  • Fair value range: $(2) to $(11)
  • Selected fair value: $-6.31 (-156.8% from current price)

3. Earnings Power Value (EPV)

EPV assesses a company's value based on its current normalized earnings power, assuming no growth.

EPV Component Value
Normalized Earnings $209M
Discount Rate (WACC) 9.9% - 6.3%
Enterprise Value $2,114M - $3,338M
Net Debt $760M
Equity Value $1,355M - $2,578M
Outstanding Shares 167M
Fair Value $8 - $15
Selected Fair Value $11.75

Key Financial Metrics

Metric Value
Market Capitalization $1860M
Enterprise Value $2620M
Trailing P/E 0.00
Forward P/E 32.43
Trailing EV/EBITDA 3.25
Current Dividend Yield 74.99%
Dividend Growth Rate (5Y) -43.68%
Debt-to-Equity Ratio 0.42

Investment Decision Framework

To determine the most reliable intrinsic value estimate, we weigh each valuation method based on:

  1. Forecast Certainty: DCF methods rely on long-term projections, while earnings power value focuses on current normalized earnings
  2. Business Model Alignment: Dividend models are more appropriate for mature companies with established dividend policies
  3. Historical Accuracy: How well each method has predicted fair value historically

Valuation Weight Matrix

Valuation Method Weight Weighted Value
Dividend Discount Model (Multi-Stage) 67% $1.85
Earnings Power Value 33% $1.18
Weighted Average 100% $10.08

Investment Conclusion

Based on our comprehensive valuation analysis, Advantage Oil & Gas Ltd's weighted average intrinsic value is $10.08, which is approximately 9.3% below the current market price of $11.12.

Key investment considerations:

  • Strong projected earnings growth (4% to 10% margin)

Given these factors, we believe Advantage Oil & Gas Ltd is currently fairly valued with the potential for long-term appreciation based on the company's growth trajectory and financial strength.