Valuation of Royal Unibrew A/S

Abstract

Investing in a stock of Royal Unibrew four years ago would have yielded a return of more than 2200% today while the Danish C20 in comparison would have generated a return of about 125%. This has led to a motivation of challenging the existing market price. Consequently, this thesis sets out to find the fundamental value of Royal Unibrew’s stock. To do so, an initial discussion and appraisal of the most appropriate valuation model is carried out. The DCF and EVA models are found to be most applicable in the case of Royal Unibrew. A financial analysis is conducted to investigate Royal Unibrew’s historical and current performance. It shows that the company has managed to improve profitability, value creating growth, and liquidity during the last few years. It currently performs considerably better than competitors in the Danish market as well as most other breweries in Europe. The strategic analysis reveals that Royal Unibrew currently holds stable positions in its markets. However, it also discloses that consumption of Royal Unibrew’s main product, beer, is decreasing considerably in Europe. Substituting products are gaining market shares while the younger population, who tend to drink more beer, is diminishing. At the same time, a global consolidation process led on by four major breweries, is threatening the existence of smaller breweries. Marketing expenditures is shown to be of significant importance due to the homogeneity of the products, which may place larger companies with an advantage. Synthesising the financial and strategic analysis leads to a forecast of key financial value drivers. Calculating the cost of capital then enables a valuation of the stock. The estimated price of DKK 332 is well below the market price of DKK 530, which indicates that the market has overvalued the stock. A sensitivity analysis shows that even small changes in the cost of capital and growth rate have great impact on the value. Thus, the “true” value may be far from the estimated price. It is recognized that there are serious flaws inherent in the valuation models. Great uncertainty comes with the associated assumptions, which make the reliability of the yielded result questionable. Therefore, the estimated fundamental value should be considered indicative only and interpreted with care.