In the previous section we have calculated a value per share that is higher than the actual share price. Since the SAIL’22 initiative and all the activities planned within the program have a major influence on our estimation of Carlsberg’s future performance, we will now analyze whether and how SAIL’22 affects the share price as well. This helps us understanding and interpreting our result of an undervalued share value.
We will take a closer look at the reaction to the announcement of SAIL’22 as well as the long-term effect of the restructuring initiative considering the time period from the announcement until the 31st of December 2017.
As discussed in the literature, announcements regarding operating restructuring usually provoke a reaction in the share price and thus represent shareholders’ opinion on the content announced. The SAIL’22 initiative was communicated on the 16th of March 2016. The announcement included an explanation of the background, content and goals of SAIL’22 (Carlsberg SAIL’22 announcement, 2016). The announcement was made and further elaborated on by CEO Cees t’Hart, SVP for Asia and Head of Funding the Journey Christopher Warmoth, Head of Finance and interim CFO Jan Thieme Rasmussen and VP of Investor Relations Peter Kondrup through a conference call (Carlsberg conference call, 2016; Carlsberg corporate presentation 2017). Shareholders were able to ask questions in the last part of the call. Additionally, a press release was published (Carlsberg SAIL’22 announcement, 2016).
Figure 23 illustrates the development of Carlsberg’s share price during March 2016. From the 15th to the 16th of March 2017, the stock price declined by 3,29 percent from DKK 612 to DKK 592.
Compared to the average fluctuations in March of 0,2 percent and a much smaller reaction in peers’
stocks, we assume that this reaction is caused by the announcement of SAIL’22.
Figure 23: Development of Carlsberg’s and Heineken’s shares between March and December 2017; own creation based on data from Bloomberg
Looking at the overall development of share prices, the decline of 3,29 percent is not significant but still reflects a negative perception from shareholders.
The negative reaction can be explained with the loss of trust from shareholders.In chapter 5.5.4 we identify that SAIL’22 is Carlsberg’s third restructuring initiative since 2003. The content and goals of the previous restructurings were very similar to SAIL’22. The Excellence Program for example aimed at improving profitability and conducted activities including efficiency improvement projects, down-sizing and refocusing. This might have the effect that shareholders do not expect a significant long-term influence and thus have rather negative expectations of restructuring activities.
The small level of reaction can also be explained with the pre-announcement in November 2015.
The announcement in March 2016 is not the first time Carlsberg mentions SAIL’22 to shareholders.
The initiative is already mentioned in Carlsberg’s annual report 2015, published on the 10th of February 2016 as well as in the financial statement as at 30 September 2015, published on the 11th November 2015. Consequently, shareholders are already aware of the restructuring and do not show a strong reaction anymore.
Based on this assumption, we would expect that shareholders react in November 2015 when hearing first about the SAIL’22 initiative.Exploring the development of Carlsberg’s share price reveals that there is an increase in stock price from the 10th to the 11th of November of 5,86 percent and during the following days. However, first of all it is difficult to isolate the reaction caused by the mention of
SAIL’22 from the reaction caused by the other content of the earnings report. Since SAIL’22 is mentioned very briefly, a relation between the naming of SAIL’22 and the stock reaction is very unlikely. Secondly, especially during the following days, the share price development of peers is increasing as well47.
Consequently, the reaction in November is most probably not caused by pre-announcements of SAIL’22 but rather the earnings report as a whole or the general development of the market.
In conclusion, the shareholders’ reaction to the announcement of a new restructuring initiative is small but negative and thus reflects skeptical perceptions on the operational restructuring initiative SAIL’22.
The aim of SAIL’22 is to improve long-term profitability. Therefore, we also take the development of the share price after the announcement into consideration. This is important as the long-term development of shares can reflect changes in shareholders’ perception or preliminary results of the SAIL’22 initiative.
Figure 24 shows the development of Carlsberg’s share price from the announcement of the initiative until the 31st of December 2017. The share price is developing positively and has increased by more than 27 percent overall during the considered period.
Figure 24: Development of Carlsberg’s stock price since announcement of SAIL’22; own creation based on Bloomberg data
47 Development of Carlsberg’s share price compared to Heineken’s share price in the appendix 50
This improvement seems to be a very good indicator of a successful implementation and execution of SAIL’22 activities. When looking at peers as well as market indices however, it becomes clear that the increase of the share price cannot solely be attributed to the restructuring initiative.
Figure 25 compares Carlsberg’s stock price to stock prices of peers as well as a market index. In line with previously conducted analyses, we compare Carlsberg to Heineken and CRB and use the MSCI ACWI as an index representing a comprehensive overview on market developments.
Figure 25: Comparison of changes in share price between Carlsberg (CARL-B.CO), Heineken (HEIA.AS), China Resources Beer (Holdings) Company Limited (0291.HK) and MSCI ACWI (ACWI); Yahoo Finance
The figure illustrates that there is an upward trend not only in the industry represented by the two peers but also in the whole economy represented by the MSCI ACWI index.
Therefore, the growth of Carlsberg’s share price cannot be solely related to the SAIL’22 initiative.
However, the developments show that Carlsberg is able to stay competitive although facing massive challenges in key regions. Despite the hesitation in the beginning of the SAIL’22 execution, investors seem to be gaining trust in Carlsberg’s success again. This process is in line with our result of the valuation: The share price is currently undervalued because shareholders are not convinced of the effectiveness of SAIL’22 yet. The upward trend of the share price however, supports our result that the share price is currently lower than it is worth and will most likely increase within the next years.