Valuation of NKT Holding A/S

Christian Kolding Andreasen

Student thesis: Master thesis


The main purpose of the thesis has been to determine the fair value of NKT Holding’s share on a stand-alone-basis as of Sep 1, 2010. The research conducted is based solely on publicly available information as well as discussions with industry specialists. The thesis employs a SOTP approach in which NKT Holding’s four core divisions are valued separately: NKT Cables, Nilfisk-Advance, Photonics Group, and NKT Flexibles. To maintain a consistent flow, the thesis considers the strategic, financial, forecast and valuation aspects separately. In the strategic analysis the divisions are studied on a macro, industry and company level. The significance of these levels depends on the division in question, as each division is pursuing specific strategies. Within the energy and industrial cable industry, NKT Cables is aiming to change its product mix by focusing more on high-margin and growth segments. In the professional cleaning industry, Nilfisk-Advance is focusing on restructuring its operations to cut costs while improving product benefits. Within the fiber laser industry, Photonics Group is working on increasing its market penetration by entering into industry partnerships with its customers. NKT Flexibles on the other hand is focusing on developing a technological edge in the market for deepwater flexible pipes. The financial analysis is based on historic ROIC calculations, where each division is compared to its peers to determine both absolute and relative performance. A decomposition of ROIC suggests whether performance has been driven by EBIT margin and/or turnover of invested capital. Further, COGS, G&A, S&M, and R&D are estimated in order to provide a better understanding of the mix between variable and fixed costs. NKT Cables has been suffering from a low capital efficiency, which can be attributed to less than full production at its new factories in Germany and China. In contrast Nilfisk-Advance’s primary concern has been a declining EBIT margin due to below-average demand from professional contract cleaners; however Nilfisk-Advance should be able to improve margins as demand resumes thanks to high operating leverage. The problem is even more pronounced at Photonics Group, which has not yet been able to deliver a positive EBIT margin due to a lack of penetration in the market. Despite being a small player compared to its competitors, NKT Flexibles has on the other hand been very profitable thanks to high operating efficiency at its plant in Kalundborg. The valuation is performed using both a DCF model and Multiples. Based on the DCF approach, the fair value of NKT Holding is equal to DKK 381 per share. The Multiples approach yields a fair value equal to DKK 359 per share. As both methods are considered equally suitable, the overall estimate of the fair of NKT Holding as of Sep 1, 2010, is equal to DKK 370 per share. The observable share price on the same date is equal to DKK 222. This in turn indicates a strong BUY recommendation. In order to verify the findings, a sensitivity analysis of the critical valuations inputs in the DCF model is performed. The analysis suggests that the DCF estimate is sensitive to changes in WACC, but immune to changes in the terminal growth rate. The latter can be attributed to the offsetting effect of corporate overhead on terminal value. Similarly the outliers from the Multiples approach is used to provide a target range for the estimate. The estimated ranges are both supportive of the buy recommendation.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2010
Number of pages126