Du-Pont

The Du Pont figure shows the decomposition of the main drivers behind ROE.

The right part of figure 4.1; the financial gearing (FGEAR), relates to the financial part of Carlsberg and the left side; return on invested capital (ROIC) - relates to the primary and

“core” operations of Carlsberg (Plenborg et al 2007, p.150ff)

The sublevel of ROIC consists of two ratios. Earnings capacity (EC), which explains the cost/earnings distribution and rate of turnover (ROT), which explains the company’s ability to adjust/use its invested capital to generate revenue (Plenborg et al 2007, p.164-179).

When evaluating the financial ratios, we look at two factors: level and development. We benchmark the level of Carlsberg’s financial ratios against the peer group and spot trends in the development in both inter- and intra-relations.

Return on Equity

ROE can be defined in many ways. Here it makes sense to name it as:

EQ NOPAT ROE=

This shows that both the balance (EQ) and operations (NOPAT) affect the ratio. The EQ part of the relationships, tells us that a difference in capital structure (mentioned in paragraph 3.4.4) can change the number significantly. The NOPAT part of the relationship displays the value creation from core operations, where the financials are excluded.

EC

NOPAT/Revenue

ROT

Revenue/IC

ROIC

NOPAT/Invested Capital

ROE

ROIC*FGEAR*NDC Operations Financials

Aggregated expectedreturnReturnfrom operations and financeSub-drivers

FGEAR

NIBD/EQ

NCD

NFC/NIBD

*

*

*

Figure 4.1 – DuPont Pyramide

Source: Own Creation based on Plenborg et al 2007

Figure 4.2 shows Carlsberg had a relatively low ROE in 2006, but have shown improvements in 2007 and 2008. Findings from the strategic analysis indicate that the Excellence

Programme on improving their margins caused it. But the capital structure of Carlsberg changed radically in 2008, because of the acquisition of S&N, and this is reflected in 2009. In 2009 the NOPAT declined a bit, but the Equity has increased, in turn making the ROE decline (see appendix 5).

All companies in the peer group have made large acquisitions in 2008, but Heineken chose to finance by issuing new debt instead of a stock emission like Carlsberg (Heineken AR 2009).

Isolated this implies that Carlsberg relatively is doing better than Heineken in adapting the new acquisition.

AB-InBev also issued stocks (AB-InBev AR 2009) and what we see is that their ROE drops in 2008 (because of a lower NOPAT), and with the acquisition they double their NOPAT.

This is a significant sign from AB-InBev, and could indicate that AB-InBev performs well in the M&A deal.

We continue by decomposing ROE into ROIC (operations), NCD and FGEAR (financials) and we start with the financials.

Net Cost of Debt The NCD is defined as:

NIBD

Tax after Costs Financial NCD =Net

NCD is rarely the same as the company’s real cost of debt (Koller et al 2010, p.243). Firstly the NCD is affected by the difference between interest on loans and deposits. Secondly other financial posts have an effect, such as currency rates and profit/loss on stocks, bonds etc. So NCD is more of an intermediate ratio used to calculate other ratios (Plenborg et al 2007).

Figure 4.2 ROE (Return on Equity)

2006 2007 2008 2009

Carlsberg 13,9% 16,6% 16,2% 10,0%

Heineken 21,2% 14,8% 7,4% 10,5%

AB-Inbev 14,4% 18,6% 7,6% 11,3%

Source: Own creation based on reformulated figures from all Carlsberg, Heineken, AB-InBev AR 2009

Figure 4.3 shows, that Carlsberg historically has had a low cost of debt as opposed to the peers. This changes in 2008 with the acquisition of S&N, financed mostly by issuing new shares, but also by short-term debt (Carlsberg AR 2009) – in turn making the NCD explode (Koller et al, p.50, 257). In 2009 Carlsberg’s costs are stabilized and also the peers are on the same level. To get closer to finding the financial risk we look at FGEAR.

FGEAR

We define the FGEAR as:

EQ FGEAR= NIBD

Figure 4.4 shows, that both Heineken and AB-InBev have increased their debt. As long as the ROIC is higher than NCD, then a higher level of debt will increase earnings (Plenborg et al 2007). Largely driven by financing of the S&N-deal with stock issues, Carlsberg displays a downward trend completely opposed to its peers.

Return on Invested Capital ROIC is defined as:

Capital Invested

NOPAT

ROIC= _

ROIC expresses the company’s return on the invested capital and directly displays how well the companies exploit the capital engaged. Carlsberg has shown a positive growth in

Figure 4.3 NCD (Net Cost of Debt)

2006 2007 2008 2009

Carlsberg 3,7% 5,1% 12,8% 6,4%

Heineken 8,4% 11,7% 3,5% 4,8%

AB-Inbev 7,8% 10,0% 3,8% 6,5%

Source: Own creation based on reformulated figures from all Carlsberg, Heineken, AB-InBev AR 2009

Figure 4.4 FGEAR (Financial gearing)

2006 2007 2008 2009

Carlsberg 0,92 0,96 0,73 0,60

Heineken 0,35 0,25 0,96 1,57

AB-Inbev 0,40 0,36 1,39 1,77

Source: Own creation based on reformulated figures from all Carlsberg, Heineken, AB-InBev AR 2009

Figure 4.5 ROIC (Return on Invested Capital)

2006 2007 2008 2009

Carlsberg 7,2% 8,3% 6,3% 6,5%

Heineken 21,2% 14,8% 7,4% 10,5%

AB-Inbev 14,4% 18,6% 7,6% 11,3%

Source: Own creation based on reformulated figures from all Carlsberg, Heineken, AB-InBev AR 2009

profitability in 2007, but a fall in 2008 and the 2009-figure shows a stagnating level.

Compared to the peers, Carlsberg is underperforming throughout the period. All companies have had a decrease in ROIC in 2008, caused by i) an increase in invested capital caused by the acquisitions and ii) a decrease in relative NOPAT caused by a lag in realizing synergies from the acquisitions.

The drop is not negative. An example of this is most explicative in AB-InBev. Their

acquisition took place in November and therefore the invested capital is large for the whole year, while the acquisition of Anheuser-Busch has only generated revenue for the NOPAT for 2 months. The decrease in ROIC shouldn’t be interpreted as a negative event, since investing is needed for future growth.

Carlsberg has a smaller decrease in 2008 than Heineken and since the indications are that the drop is caused by the acquisition of S&N, it looks like Carlsberg has adapted and integrated S&N faster (as mentioned in paragraph 4.2.1). Heineken is not fast but perhaps more effective. Because Heineken displays a 2009 growth of ROIC, due to increases in NOPAT.

Even though the impacts of the financial crisis would/should be even across the industry, the alleged behaviour is a drop in NOPAT (due to less demand). Furthermore a drop in Invested Capital is observed due to a combination of less willingness of banks to lend out money, and increased uncertainty and volatility on markets. In essence Carlsberg would have more trouble in finding a project with a positive NPV, since the WACC should increase (Koller et al 2010, p.101, Fratianni & Marchionne 2009 and Jorion 2006).

We credit the positive trend Carlsberg showed up until 2008 in earnings capacity to the Excellence Programmes mentioned in paragraph 2.4.1. Disregarding the financial crisis “dip”

- we believe the programme will ensure future improvements in profitability of Carlsberg.

Another indication is the fact that Carlsberg is significantly lacking behind both Heineken and AB-InBev so surely there should be “room for improvement” (Myers et al 2010, p.309).

ROIC is now decomposed into two underlying drivers/ratios:

§ Earnings Capacity (EC)

§ Rate of Turnover (ROT)

EC multiplied by ROT gives us the ROIC (Plenborg et al 2007, p.164) and these ratios will now be analysed.

Earnings Capacity (EC)

Earnings Capacity is an aggregated ratio that explains the relationship between revenue and costs. We define EC as:

venue NOPAT EC= Re

Figure 4.6 shows Carlsberg has an increasing development up until 2008, with a small drop in 2009. Carlsberg is ‘on par’ with Heineken and lacking behind AB-InBev. In total Carlsberg has the biggest increase in 2006-2009 and AB-InBev is quite volatile on a very high level.

This ratio is not affected by the noise between the balance and income statement – and the figure strongly indicates that Carlsberg has a steady growth as opposed to the peers.

Rate of Turnover, Invested Capital Defined as:

Capital Invested

venue

ROT _

= Re

Carlsberg show growth in ROT up until 2007, which could stem from their Excellence Programme (more and more evidence confirms) - but fails to withhold that momentum when acquiring S&N in 2008.

Figure 4.7 shows that when companies made the large acquisitions the invested capital

increased more than the revenue. Carlsberg displays “worst practise” in creating revenue from their invested capital. But it could be because Carlsberg’s “investments” have a longer “pay-back” period since the cash flow back from operations might come in a few years.

The conclusion is that Carlsberg fails in reaching “best practice” both when it comes to EC and ROT. In turn this explains the lower profitability when compared to the peer group.

Figure 4.6 EC (Earnings Capacity)

2006 2007 2008 2009

Carlsberg 6,5% 7,2% 10,9% 10,1%

Heineken 12,2% 8,4% 5,4% 9,6%

AB-Inbev 18,9% 24,6% 18,4% 25,2%

Source: Own creation based on reformulated figures from all Carlsberg, Heineken, AB-InBev AR 2009

Figure 4.7 ROT (Rate of Turnover)

2006 2007 2008 2009 CAGR 06-09

Carlsberg 1,09 1,17 0,84 0,60 -13,7%

Heineken 1,74 1,75 1,37 1,10 -10,9%

AB-Inbev 0,76 0,76 0,41 0,45 -12,4%

Source: Own creation based on reformulated figures from all Carlsberg, Heineken, AB-InBev AR 2009

In document A Valuation of Carlsberg (Sider 65-70)