B&O is a Danish company that specializes in designing, developing and selling luxury audio and video products on a global scale. The firm is widely known for its innovative and exploring nature with regards to the market for premium audio and video products. B&O has established a brand that signals luxury and prestige in an industry with few comparable competitors. Furthermore it is clear to say that the financial crisis has had a huge impact on the performance of B&O.
The crisis forced B&O to change several parts of the organization. A new CEO was brought in, who introduced a new strategy Leaner, Faster, Stronger. This led to restructuring in the firm, and
hereafter B&O announced the launch of the sub brand B&O PLAY, in order to target the younger segment, something that the AV has struggled with.
The firm has limited its business units with the sale of the unit Automotive to Harman Industries and the unit ICEpower being up for sale, thus focusing on the core business B2C that consists of B&O PLAY and the AV units. B&O operates in Europe, North America and the BRIC region. The products are sold through B1-shops and Shop-in-Shops. B&O are in a state of restructuring their retail network, where focus is on increasing the customer experience and gaining higher profit.
A strategic analysis was conducted which comprised of three major analyses, the industry, internal and macro environmental analysis.
The industry environmental analysis used Porters 5 Forces and concluded that B&O operate in a good industry with few competitors, who can only impact B&O’s future performance on the threat of substitutes, due to the development in technology that provides many alternates to B&O.
The internal environmental analysis used a Value Chain analysis which showed that the primary activities in B&O are innovation and design, and marketing and sales. People see B&O as a luxury and unique brand with high end products.
The macro environmental analysis used a PEST analysis, illustrating the political, economic, and technological factors having the highest impact on B&O’s performance in the future. The economic factors are seen to have a positive influence due to the estimated growth in real GDP, market size and spending habits on luxury products for China and India where population is growing rapidly.
The technological factors are seen to have a negative impact on B&O due to their slow product launches, long life cycle of products and premium prices, however the market suggesting the opposite due to the fast evolution in technology.
65 The financial statement analysis illustrated how B&O will perform in the future. Return on Equity has been fluctuating and no consistency has been found in the development of the ratio. ROE has been effected from the operations, ROIC and the Profit Margin.
B&O must focus on their Profit Margin in order to improve Return on Equity, and it is seen that operating with debt to finance the operations has not been profitable for B&O.
A set of forecasting scenarios were illustrated, these included a base case scenario, best case scenario and worst case scenario.
The base case scenario is the scenario that B&O are most likely to experience. The other two scenarios provide a range for what B&O should be valued at, given the negative and positive expectations.
The base case scenario assumptions are conducted on the basis of the strategic and financial statement analysis. The assumptions forecast that real GDP will grow on a global scale, and it forecasts that the population is ageing. Furthermore it expects B&O to excel in China and India, and expects the sales in Europe to increase. It expects faster product launches and expects the rivalry to be status quo.
The Weighted Average Cost of Capital was estimated at 7.04% and the terminal growth rate was set to 3%, these values were used in the DCF. The DCF resulted in a fair share price of DKK 53.27 as of October 25th, 2016. The estimated share price is of DKK 53.27 is equal to approximately a 23%
decrease of today’s (October 25th) share price of DKK 76.00.
Furthermore this thesis applied multiple from peers, however this analysis not being very dependable due to their not being truly comparable peers. The analysis provided a relative enterprise value of DKK 2.376 million (share price DKK 55).
Finally this thesis contains a brand valuation which estimated the brand value to DKK 1.862m and estimated the share price at DKK 43.42. The worst case scenario estimated a fair share price at DKK 4.71.
The analysis realizes an estimated brand value to be DKK 1.862m and that gives a share price equal to DKK 43.42 as of October 25, 2016.
A DCF valuation based on the forecasts resulted in a fair value of the B&O stock as of October 25th 2016 of DKK 53.27 with a closing market price on the date of valuation being DKK 76.00. Hence,
66 the fair value seems realistic; however the market seems to overvalue the stock. A sensitivity
analysis was conducted to stress test the estimated value. As these resulted in stock values are in close range to the estimated fair value, the relative valuation and the sensitivity analysis support the fair value.
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11. Literature