Valuation of LEGO Group

Abstract

The purpose of this thesis has been to estimate a fair value of the LEGO Group as of December 31st 2012, with the perspective of an investor or prospective buyer. The valuation is based upon strategic and financial analysis, as these allowed for the necessary forecasts to be estimated. The strategic analysis applied different models in regards to three levels of strategic analysis. The PEST model was applied for the macro environment analysis, Porters for the industry analysis and the VRIO framework for the internal analysis. LEGO’s primary revenue is made in Western Europe and North America, but while LEGO does not experience significant growth on the Western European, it has experienced growth of more than 20% in 2012 alone on the North American market. LEGO’s growth in emerging markets was significant, but as the total sales in the regions were of a lesser degree, the impact was big. In general the analysis portrayed a bright future for LEGO, due to a strong brand, an optimized operating model and plenty of opportunity for growth The financial analysis showed LEGO has had strong sales growth, decreasing costs and thereby increasing profit margins, effectively showcasing the complete turnaround since 2004. LEGO’s ROIC and ROE were found to be much higher than its peers, as both Mattel’s and Hasbro’s financial were dissected. These two chapters’ findings were applied to forecast future performance for LEGO, as both the income statement and the balance sheet were budgeted for the forecast period. The forecasts show continued sales growth, although at a decreasing rate, while costs are expected to increase gradually. The DCF and EVA models were applied to estimate the fair value of the LEGO Group, resulting in a value of 114.607,5 million DKK. The value is substantial as it is far higher than the enterprise value, based upon shares and share price, of market leader Mattel. A sensitivity analysis and multiples comparisons analysis were conducted in order to critically asses the result of the valuation models. LEGO’s value was found to be sensitive to changes in WACC, in particular the cost of equity, which influences LEGO’s WACC by 85,32% due to its capital structure. The multiples comparisons showed that LEGO was valued very highly by the thesis, but this has to be adjusted for the peers’ bad match in sales growth with LEGO, as their sales growth is much lower. The thesis estimates that the found value of 114.607,5 million DKK is a representative assessment of LEGO’s value as of the 31st of December 2012.