Quantitative IPO valuation of Volvo Cars

Mads Heldbo Jensen & Mikkel Holck Petersen

Student thesis: Master thesis


The main objective of the thesis is to determine the initial public offering valuation of the Swedish car manufacturer Volvo Cars in a hypothetical IPO at the Swedish stock exchange as of April 30th, 2019. This is done by estimating the fundamental value of the company and subsequently estimating the IPO-underpricing. The fundamental valuation is based on a top-down revenue forecasting approach estimating revenue growth based on market growth, market shares and price developments. Throughout the paper, the market growth is highlighted as being relatively modest in line with the industry being mature. Volvo Cars is assessed as currently holding a short-term competitive advantage due to its strong market position and product offering in line with the transition to electrified mobility, however, the rising competition in the electrification segment is likely to pressure its current market position as well as prices in the long-term. Furthermore, the intended transition to offering solely electrified vehicles is expected to have considerable impact on margins as electrified vehicles are more expensive to manufacture, although significant cost savings are considered realistic in the years to come. The remaining value drivers are deduced from the historical development as well as other trends. Based on our proposed assumptions, the fundamental value of Volvo Cars is SEK 162,956m. The estimate is investigated further through applying sensitivity and scenario assessments as well as relative valuations. Next, the phenomenon of IPO-underpricing is investigated based on a thorough review of established theories explaining the empirical tendency for IPOs to be underpriced, which is observed by significant first day trading appreciations. The prediction entails running several regressions prior to selectively choosing the final model. The final model we propose includes variables related to the exchange for the listing, the revenue CAGR and return on assets of the company, the standardized P/B-ratio for comparable companies including a squared term, and finally, the IPO activity prior to the IPO. Using our uniquely compiled sample of 88 Swedish IPOs in the time period of 2007-2019, we predict the IPO-underpricing of Volvo Cars to be 9.77%, or SEK 15,921m. Conclusively, the IPO valuation is estimated to be SEK 147,035m

EducationsMSc in Auditing, (Graduate Programme) Final ThesisMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2019
Number of pages283