The purpose of this master's thesis was to estimate the fair value of NKT Holding A/S as stated in the research question. The analysis have been conducted by going through different phases represented by each section in the thesis. Each section has contributed to answering the research question.
Phase I - Strategic analysis
The strategic analysis described and discussed the strategy of each 3 business units of NKT Holding: NKT Cables, Nilfisk-Advance and Photonics Group.
The strategic analysis of NKT Cables showed that they have a very fine presence in the important markets of Europe and China. The importance of being present in China is the higher expected growth in the country leading to more investments It is also expected that a country like China will invest more in wind power leading to business opportunities for NKT Cables. This is in fact a world wide trend that NKT Cables potentially can gain from.
In general NKT Cables has exposure to a diverse list of countries that makes the company less vulnerable to market slowdowns or political unrest in certain regions.
The production facilities of NKT Cables has also been stregtened through the factory in Cologne. This has enabled to company to produce more lenghty cables which results in fewer joints and less vulnerability in a cable system. NKTs competitors cannot deliver this in same scale.
But things are not all good in the cables division. In general business has been bad due to the economic slowdown. NKT Cables has a relatively low market share and in an economic
turmoil as the present the company has to compete on price. Therefore the pressure on margins
are high and profits go down. At the same time NKT Cables risk that government decision to enhance renewable energy systems are delayed due to lower spending and different focus.
So with intensified competition world wide and low growth rates NKT Cables faces a challenge in the coming years.
Nilfisk-Advance is also present in many countries worldwide. In contrast to NKT Cables Nilfisk-Advance has a fine market share although there is still potential to grow. The position of Nilfisk-Advance is very strong because of a very large and diverse product portfolio with products of high quality. At the same time the company strives to develope more complex and efficient cleaning machines in the future. Their market position is very strong and the business momentum is good. Although Nilfisk-Advance is also affected by economic slowdown their business setup is more flexible because the level of outsourcing.
Threats for Nilfisk-Advance is an intensitied level of competition that can put pressure on prices. Also the prospect of customers joining in larger groups to create larger bargaining power. But the size and market position of Nilfisk-Advance and the politically right green profile dimishes this threat for now. Nilfisk-Advance is the the business unit of NKT Holding A/S that keeps general growth rates at a certain level.
Photonics Group is the business unit that accounts for the smallest part of revenues at present.
But Photonics Group focuses on a business area that is still very new. The company still
focuses mainly on R&D but has also just begun to get contracts. The growth rates are high, but the market is still very immature. In order to materialize on the comprehensive patent portfolio there has to be invested heavily and partnerships and sales networks has to be established.
Besides that Photonics Group has to hope for smooth regulatory approval of new products and ever increasing demand for their solutions. The potential growth rate for Photonics Group going forward is huge.
Phase II - Financial analysis
The financial analysis first commented on the historic profitability of the company followed by the forecasts of the future explicit forecasting horizon and the terminal period.
The profitability analysis took the reader through the different stages of the Dupont-model.
First the ROIC was analyzed showing us that the company has had a hard time adding value in later years. ROIC was acceptable in the beginning of the historical period but within the last 3 years ROIC was lower than WACC meaning that the company destroys value. The ROIC told us that something in NKT Holding A/S needs to be fixed. The profit margin has been fairly stable through the whole period but at a very low level. This underlines that especially the cables division operates in are low margin environment where costs are high and that this has to be adressed. In Nilfisk-Advance though the situation are much more robust. Although revenues are not increasing right now earnings are strong. A high operational gearing is the most important value driver in Nilfisk-Advance.
ROE has the same tendency as the ROIC. It reveals that the shareholders do not get sufficient return for the investments made. Especially with the level of risk that is implied when
investesting in NKT Holding A/S.
The strategic analysis formed basis for the forecasts of the future income statement, balance sheet and cash flow statements of NKT Holding. These were created using different forecast ratios that has been estimated based on the historical ratios and where it was appropriate they were modified to fit the future.
The growth rate has been estimated based on the strategic analysis only and the numbers are an average of the estimated growth rates of each business unit. Nilfisk-Advance is the business unit that grows the most and where the future looks brightest. NKT Cables is the business unit that weights heavily on the growth rates as market growth seems to fade and profitability does the same. Photonics Group has great prospects and large growth but still very immature and a accounts for a small part of total revenues.
Phase III - Valuation
The valuation of NKT Holding A/S was performed using the before mentioned forecasts. The valuation it self was done applying the discounted cash flow model and verified applying the residual income model. The reason behind choosing these two models are described.
Then the WACC was estimated for the whole forecasting horizon. The WACC is not the same each year as the expected capital structure of the company was taken into account. The
average WACC during the entire forecast horizon was estimated to 8,123% applying the necessary inputs. Also the constant growth rate, g, was estimated to be 3,5%.
After that the fair value of a share in NKT Holding A/S was calculated to be 248,65 DKK. The valuation of the company was verified through the residual income model that resulted in the same price, only with a very small deviation of 0,09 DKK.
The actual price of the share on 1st October 2013 was 275,40 DKK and therefore slightly overvalued according to my valuation. The sensitivity analysis showed that a realistic price range of the share would be the interval between 217,25 DKK and 297,22 DKK depending on the level of terminal growth and WACC. This showed that relatively small changes to the inputs can have a relatively large impact on the estimated share price.
7.1 The aftermath
This final section of the thesis will shed light on the happenings after October 1st 2013 and relate these happenings to my estimated value as of the valuation date.
NKT has in november 2013 reported that the cables division experience growth in HV projects and within the railway segment with significant growth in China. This though could not make up for the challenges that are in the MV and construction markets. Nilfisk-Advance has
continued its strong performed realizing strong growth, while Photonics Group has high growth. In november 2013 NKT Cables announced a potential participation in a larger submarine cable project called Gemini. In february 2014 NKT Cables reported that the consortium had gotten financial backup to proceed.
The share price of NKT Holding A/S has since the October 1st 2013 moved up dramatically.
The upward move in the share price does not correspond to the my estimated price of the share nor to the reported development of the company. The share price have outperformed the Danish stock index OMXC20 Cap by around 13% from start of November 2013 until start of February 2014.
The primary reason for the higher stock price is the prospect of NKT Holding A/S divesting its Cables business, NKT Cables. NKT Cables was the business unit where growth rates were very low, the market seemed tough and the pressure on prices was high.
Figure 23 - NKT share price development since October 1st, 2013
Source: www.morningstar.com
According to one of the analysts 44 the share price of NKT had reached a level where NKT Cables is included to almost a price of 0. This could lead to a take over of the cables business for example from a larger player in the cables industry. It is not expected to happen anytime soon though as the the cables division need time to turn things around.
In my analysis I have not taken into account the possibility of divesting parts of the business.
My point of view has been that the business where going concern in its original shape.
44 Nordea Markets