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Valuation of Royal Unibrew - a Strategic and Financial Analysis

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Valuation of Royal Unibrew - a Strategic and Financial Analysis Copenhagen Business School 2009 cand.merc. Institut for Finansiering MSc Finance and Strategic Management Valuation of Royal Unibrew - A strategic and Financial Analysis Master’s Thesis Hand-in date 03.06.2009 Academic Advisor: Carsten Kyhnauv Censor: _______________________ Authors: ______________________________ _________________________________ Christian Lintner Óli Örn Hlöðversson cpr: 080483- cpr: 230275- Masters Thesis - MSc in Finance and Strategic Management Valuation of Royal Unibrew Executive summary: The purpose of this thesis was to determine the fair value of one Royal Unibrew stock and whether the stock is worth buying, this was done on the basis of a strategic and financial analysis. Royal Unibrew is a relatively new company in its current form; a product of mergers within the Danish brewing industry. From the get go the company was focused entirely on the Danish market, but as the company grew larger focus shifted towards expansions abroad. The first foreign acquisition took place in 1999, the most recent in 2007 the regions targeted have been Eastern Europe as well as the Caribbean. To be fair the acquisition streak was rather slow until the launch of the 2005 strategy “MACH II” which as the name suggests was about growing and doing so fast. Royal Unibrew’s strategic decisions since the launch of the MACH II strategy in 2005 has established the company on the international scene, and enabled it to claim a share of the growing Eastern European markets. Unfortunately this strategic direction seems to have been driven by exuberance and over-confidence in own capabilities to expand into new markets. It has lead to the situation today were massive write-downs in Poland combined with high leverage has left the company in bad economic shape. The overarching problem for Royal Unibrew is its debt, with a debt-to-EBITDA ratio of 8.4 Royal Unibrew is far exceeding their own desired capital structure suggesting a debt-to- EBITDA ratio of 3. Given the overall financial state of Royal Unibrew the abolishment of the Double Up strategy plan and subsequent new strategic goals of focusing on operational efficiency and profitability as well as bringing down debt makes good sense. The company is not in a position to make investments, debt is the major issue currently that must be addressed, and however operations will not contribute sufficiently towards bringing down debt, at least not for the first couple of years. As a result assets must be sold to accelerate the maturing of debt. Besides dealing with its debt Royal Unibrew is expected to endure problems due to the current financial crisis. Margins will be lower as sales move from the On-trade to Off-trade, demand in Eastern Europe is expected to stagnate at best, but more likely decrease due to the impact of the financial crisis on these economies. 2 Masters Thesis - MSc in Finance and Strategic Management Valuation of Royal Unibrew We expect that the decline in sales from Eastern Europe, the Baltics more specifically, will have the effect that total sales will decline; Western European and Malt & Overseas sales are expected to remain relatively stable. The expected stagnation of market growth across the board will inevitable change the competition parameters in Eastern Europe, from one keeping market share and capitalizing from market growth to a situation of battle for market share. RBREW’s strategy of operating several smaller brands has so far been performing somewhat up to expectations we do however expect that this strategy will prove costly during the financial crisis. Using a calculated β of 0.905, a risk premium of 6.7 and a cost of debt of 400bps over the risk-free rate, the result was a Weighted Average Cost of Capital of 10.61% for RBREW. Using the WACC to discount the company’s forecasted future cash flows and residual income resulted in a fair value share price of: DKK 251.73 using DCF DKK 253.60 using EVA A multiples sanity check was then applied which enforced our belief that EVA and DCF results are indeed reasonable, thus that time horizons and expected future developments are fair. Having concluded at a fair price for RBREW stock well above the market price of DKK 118.5 the question is whether the stock is actually a sound investment opportunity. Literature proves that Value stocks historically outperform Growth stocks. Given RBREW’s current characteristics of negative P/E, low P/BV as well as a low MVA pr share we find it clear that RBREW is a value stock. Combining these findings we therefore conclude that not only is RBREW currently undervalued by traditional standards (DCF, EVA and multiples), in fact this is also the case based on historical stock market data. Therefore we recommend buying RBREW stock with a 2-5 year holding period in mind. 3 Masters Thesis - MSc in Finance and Strategic Management Valuation of Royal Unibrew Table of contents: Chapter 1 - Introduction.....................................................................7 1.1 Introduction ...................................................................................................................... 7 1.2 Problem Formulation........................................................................................................ 9 1.3 Outline............................................................................................................................ 11 1.4 Methods and Models ...................................................................................................... 12 1.4.1 Method .................................................................................................................... 12 1.4.2 Models..................................................................................................................... 14 1.5 Criticism of Sources....................................................................................................... 16 1.6 Limitations ..................................................................................................................... 17 Chapter 2 – Royal Unibrew’s History .............................................18 2.1 History............................................................................................................................ 18 2.2 Ownership ...................................................................................................................... 19 2.2.1 Ownership Structure................................................................................................ 19 2.2.2 Owner Profiles......................................................................................................... 19 2.2.3 Changes in Ownership ............................................................................................ 22 2.3 Management................................................................................................................... 23 2.3.1 Board structure ........................................................................................................ 23 2.3.2 Remuneration .......................................................................................................... 24 2.4 Products.......................................................................................................................... 24 2.5 Markets........................................................................................................................... 25 2.5.1 Geography ............................................................................................................... 25 2.5.2 Market Turnover ..................................................................................................... 26 2.6 Economy......................................................................................................................... 27 2.6.1 The Financial Year 2005......................................................................................... 27 2.6.2 The Financial Year 2006......................................................................................... 27 2.6.3 The Financial Year 2007......................................................................................... 28 2.6.4 The Financial Year 2008......................................................................................... 28 2.7 Strategy........................................................................................................................... 29 2.8 Sub-Conclusion .............................................................................................................. 30 Chapter 3 – Strategic Analysis .........................................................32 3.1 External analysis ............................................................................................................ 32 3.1.1 PESTEL................................................................................................................... 32 3.1.2 Porter’s Five Forces ................................................................................................ 40 3.2 Internal analysis.............................................................................................................. 48 3.2.1 Porter’s Value Chain ............................................................................................... 48 3.2.2 Ansoff’s Product/Market Grid ................................................................................ 54 3.2.3 The Growth/Share (BCG) Matrix ..........................................................................
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