Ringkjøbing Landbobank

Ringkjoebing Landbobank is one of the few banks that were profitable throughout the financial crisis. Today they are still one of the strongest and most profitable banks, which are reflected in the market valuation.
The question is, is Ringkjoebing Landbobank worth even more?


Ringkjoebing Landbobank at a glance
Ringkjoebing Landbobank is unsurprisingly based in Ringkjoebing with strong presence in the western part of Jutland. The bank has specialized in financing wind turbines and medical practices and has a long history, dating back to 1886. Ringkjoebing Landbobank is known for high credit quality and consistency in management. We have looked into their impairments during the financial crisis, which did increase, but far less that most other banks. The loans portfolio is very well diversified with the exception of a very high exposure to wind turbines. However the credit risk associated with wind turbines is very limited as long as governments subsidize them. If government support of wind turbines is decreased it will have a significantly negative impact on Ringkjoebing Landbobank earnings. That said, Ringkjoebing Landbobank looks to be on track to continue the past strong performance.


Equity Cash Flow Model
To make a valuation of Ringkjoebing Landbobank we have chosen to use two models: an equity discounted cash flow model, which gives an absolute valuation combined with a peer analysis that gives a relative
valuation. To apply the equity cash flow model, we need to implement different forecasting assumptionsfor the different value drivers in Ringkjoebing Landbobank.
The key forecasted factor is the interest rate. To precisely forecast the interest rate, a huge holistic approach is needed, which we do currently have the resources for in Investment Panel Aarhus. Therefore we assign a more intuitive approach to set the expected future interest rate at which Ringkjoebing Landbobank can borrow funds, also called the LIBOR‐rate. The expected LIBOR‐rate is higher for 2015 than2014, thus indicating an interest rate rise. Furthermore a survey conducted by The Economist predicts a small positive sentiment from leaders around the world:

Therefore we expect the interest rate in 2015 and the following years to increase.
To be able to discount the expected future cash flows to equity, we need to estimate the cost of equity (COE) for Ringkjoebing Landbobank. This is done by using the guidance by Aswath Damodaran, who assigns a COE of 6,5 % approximately. The stock value is stress tested with +1%/‐1% in COE. The net effect on loans versus deposits is difficult to estimate because of demand versus supply effects in the loan and deposits markets. Here we expect an average effect to occur. All growth in loans and deposits is expected to be equal to the inflation level of 2% from year 2020.

Figur 1
The resulting upside is around 50‐130%. The effect of changes in loan/deposit/interest rate is surprisingly small compared to changes in COE. We do find the COE to be rather low, and the indicated upside to be a little optimistic, however there is no doubt, there is a significantly upside, based on the equity cash flow model.


Peer analysis
While the absolute valuation indicates a significant upside in Ringkjoebing Landbobank, it is still relevant to look at the relative value compared to other listed banks of comparable size.

Figur 2

When looking at the peers, Ringkjoebing Landbobank stand out with the highest ROE and second best Risk index score, which is rather unsurprisingly given the quality of the bank. But the quality comes at a price;

Ringkjoebing Landbobank is the most expensive measured by P/E and P/B but has a great dividend yield, being only second to Groenlandsbanken in that parameter. Overall Ringkjoebing Landbobank is the most expensive bank when compared to the peer but if Ringkjoebing Landbobank can continue their growth, they still look attractive.
In conclusion, Ringkjoebing Landbobank is a very well managed bank with great credit quality and most likely a bright future. The stock is not exactly cheap at the current valuation, but quality comes at a price, and we believe there is more upside in Ringkjoebing Landbobank, thus we recommend BUY.
Authors: Thomas Tang Axelsen

Zealand Pharma

Business info
Zealand Pharma A/S is a Danish based biopharmaceutical company which is engaged in the discovery, development and commercialization of peptide medicines. Their pipeline contains:

  • Lyxumia (Lixisenatide)–At the market
  • Lyxumia/Lantus (Lixilan)–Phase III
  • ZP2929–Phase I
  • Danegaptide–Phase II
  • Elsiglutide–Phase II

The overall pipeline includes cardio-metabolic diseases that are the underlying medicine for diabetes, and obesity treatment and the company’s most valuable partner right now is Sanofi who is handled with the products Lixisenatide and LixiLan.
Exposition of the pipeline
The product Lixisenatide is a drug for treatment of adults with Type 2 diabetes. In 2013,Lixisenatide was approved in both Europe and Japan and under regulatory review in anumber of other countries globally, paving the way for future sales growth. A general industryconsensus believes that once the product is approved in US (the worlds largest market fordrug of insulin), the sales will accelerate, leading to forecasted sales of € 696 mill. in 2018. Inour forecasted model, only a one-time milestone payment of € 19 mill. is incorporated, sinceLixisenatide is already a marketable product. The specific agreements regarding royaltyrevenues are unavailable for the public, but lies in the low-double-digit region. Based on thelittle given information, a fair estimate is royalty revenue of 15% of total sales. Due to the factthat the product is already marketable in Europe and Japan, and is expected to apply forregistering in the US in summer 2015, the probability of receiving the royalty revenues isfairly high compared to some of Zealand Pharma’s other products.
This is a combination product of Lixisenatide and Sanofis Lantus. In the following two years,the key driver of expected income is milestone payments. LixiLan is currently in Phase III, andregulatory filings are expected to occur late 2015. Our sales forecast is based on theexpectation that LixiLan is marketable from 2016, which is also the last year that LixiLan willreceive milestone payments. The unpredictable nature of pharmaceuticals has made us relyon analyst consensus reports. Total sales in 2018 are expected to be € 734 mill. After 2018,the sales are forecasted to grow at the rate of inflation. Royalty revenues are expected to be15% of total sales, and the probability of receiving the milestone payments is considered to berelatively high. Due to the late development stage of LixiLan, and the fact that Sanofi is astrong market player, the optimism for the products succes in the market is rather high.
The product ZP2929 is a drug for diabetics and obesity. The market is fast changing with many players, so naturally it is hard to find the money to develop the drug. Zealand recently lost Boehringer as their partner due to better potential in another drugs.
The main factor of the cash flow is the milestones from partners and we see low likelihood of a new partner for ZP2929, a once-daily glucagon injection, is a lesser attractive investment than the brand new drug in process of Zealand, a glucagon tablet that require no injection. As this new drug just emerged, we can only expect low cash flow with low probability of reaching the market and hence we tried to include this in the cash flow of ZP2929. We set a chance of obtaining a new partner to 15%.
Assuming the maximum sales is the sales of Novo Nordic’s Victoza we projected the royalties of ZP2929 that is, according to the previous Boehringer deal, is “… a high single to low double digit of global sales”. As the product is estimated to reach the market in 2021 and the similar Victoza already in stores, the sales are expected to be 15% of Victoza.
– Danegaptide This drug can bring oxygen to the heart musculature. The realty of the product is dependent on finding a partner who can truly or partial pay for the cost to take the drug to the next phase. The probability is expected to 20% because Danegaptide has succeeded in a lot of tests, which probably will make the attractive for a new partner to make a partnership. But of cause there is a risk.
This is a drug to treat diarrhoea, which can break out under chemotherapy. The drug is not dependent of partnership agreement probability because Zealand Pharma already works together with Helsinn. The drug is only at phase II that makes a probability for succeed the coming phases approximately a bit under 50%, which makes the future milestone earnings less likely. Because the expected royalties for the product first lie in the future (expected six to eight years from 2014) and the probability to get the permission is estimated to be very low, the net present value of future royalties are very low. The induced milestone earnings are the most important earnings for Elsiglutide.


Cash burn
The company has a yearly cash burn of approximately € 24 mill. The majority is spent on research and development (€ 20 million) but administration cost is also significant (€ 4 mill.). With cash position of € 40 mill., Zealand Pharma can run 20 months without income or new capital. However Zealand Pharma is collecting significant revenue from milestones and is in addition starting to earn royalties. As long as Zealand Pharma has moderate success with their drugs going forward, we do not expect them to need to raise new capital.
As seen on the figure above, the calculation for the company’s valuation ends at a total net present value of € 150,7 mill. which corresponds to a share price of DKK 48,7.

Zealand Pharma - Table1
The conclusion of the valuation is clear, we recommend to not invest in the company, because the expected share price is DKK 48,7 and todays share price is DKK 62,0. It is important to underline the relatively high uncertainty of the future earnings, given the heavy reliance on the outcome of clinical tests.

Authors Allan Gjerløv Jensen, Thomas Tang Axelsen

Harboes Bryggeri

The company
Harboe is the third largest brewery in Denmark, behind Carlsberg and Royal Unibrew. It was founded in 1883 and has been a publicly traded company since 1989. While it is an important player in the Danish Market, the company is still relatively small in the global scene. One of Harboe’s main efforts is growth through new markets. It currently received over 40% of its revenue from Germany, around 25% from Denmark and the rest is coming from other countries.


The primary strategic focus of the company is to produce low end products at low costs, hence using price as the competitive advantage. Nonetheless, changing consumer preferences have forced Harboe to look for other ways to improve profit and consequently, the company is beginning to put more emphasis on product development and marketing in an effort to differentiate its products towards markets with higher profit margins.

The Challenges
During the last decade, the company has been a poor performer in terms of growth and profitability; this has led to the rather poor performance of its stock when compared to peers. To put things into perspective we can compare Harboe’s performance with a close competitor Royal Unibrew. The company’s revenue has had a geometric growth rate of just 1.1% during the last five years, whereas Royal Unibrew achieved a geometric growth rate of revenue of over 13% over the same period. In terms of profitability the picture is almost as bleak. Harboe’s EBIT margin in 2013 is only 4.2% against 12.5% for Royal Unibrew.
Harboe’s poor performance is the result of two main factors: first, the company is competing on price and this leads to ever smaller profit margins in an industry that is characterized by low growth and high competitive rivalry. The beer industry has experienced market saturation in much of the developed world, which has limited the industry’s growth potential and forced many companies to focus on emerging markets. With fewer options for growth, competitive pressure has forced consolidation through mergers and acquisitions. This has further decreased the company’s ability to compete with bigger players that utilize economies of scale.
Second, there has been an overall decline in the size of the beer market in both Germany and Denmark.
From 2010-2012 beer consumption in the two countries fell with 4.8% and 3.6% respectively. From 2013-2018 Germany is expected to experience a further decline in volumes of 1-2%. Danish volumes are on a similar declining trend; however, in 2013 volumes received an upward shock in form of reduced duties and beer prices.
While these factors could imply a good case for turn around, we find this scenario to be highly unlikely given the third challenge, namely current management. Bernd Griese has been CEO of the company for almost three decades and he holds over 53% of the voting rights. He has stated his desire to stay in management and has blocked most possibilities for outside intervention or the possibility of an acquisition.

The valuation
As mentioned, the stock market has not taken too kindly on Harboe as a stock and its poor performance has been clearly reflected in the price. The company does not trade cheaply; it has a 12 month forward P/E of 76.8 against a peer average of 19.1. Forward EV/EBITA paints a different picture, since Harboe’s has a multiple of 6. 9 against a peer average of 8.9.
To establish is the company has upside potential we made a DCF valuation which indicates a fundamental value of 98 DKK per share (market price at date 8/28/14 is 94 DKK per share). The analysis is based on a growth rate of 2%, stable margins and a WACC of 8%. Since Haboes margins are very low, relatively small nominal changes in margins have significant impact on the value of Harboe. However, we do not expect to see positive developments in the value of the company and can conclude that the market is pricing it right.

Harboe - Table1





Arkil Holding A/S is a Danish-based engineering and construction company with headquarters in Haderslev. The company is engaged in various types of construction works, performs asphalt surfacing and maintenance, foundation and marine construction and road service. Besides Denmark, Arkil also operates in Germany, Ireland and Sweden. The company has 1.166 employees and the revenue for 2013 was 2.776,4
million DKK. The foreign part accounted for a total of 29 % of revenues. Arkil’s expectations for 2014 are revenue of 3.000 million DKK. and a profit before taxes between 50-80 million DKK.

Our DCF analysis is based on the free cash flow approach which assumes that shareholder wealth is directly related to the free cash flows generated by the company. In order to compute the free cash flow of Arkil the main drivers in the model has been forecasted: net profits, depreciations, CAPEX and net changes in net working capital.


In the revenues forecast we start out with revenues for 2014 of 3.000 million DKK equal to Arkil’s own expectations for the year. A future revenue growth of 7,4% in 2015 is assumed based on the 2010-2013
mean. This growth rate is from 2015-2018 set to fade linearly to 2% – our long-run growth rate. The associated costs are forecasted in a similar  manner, however company marginal taxes rates are set to 23,5%
in 2015 and 22% hereafter in accordance with proclaimed tax rules. This provides a net profit forecast asseen in the table below.
To forecast the net changes in net working capital of Arkil we notice from the table below that net working capital the last 3 years approximately has been a fixed percentage of revenues. We therefore set future net working capital equal to this fixed percentage and thereby get forecasted net change in net working capital.
The depreciations are assumed to remain on the 2013 level since there have only been small variations in the item and no obvious trend in the past years. Further, CAPEX is set to fade to this level in order to ensure
balance between the two items in the terminal part.


Arkil - table1

To sum up, the forecast for the main drivers is seen below.

Arkil - table2

We use a WACC of 9%, which again is reasonably conservative.

Computing the free cash flows and doing the valuation we get share price of DKK 1.727,58, which compared to the actual share price of 26-05-2014 of DKK 865 equals an up side of 99,7%.

Arkil - table3

Multiple – valuation metrics, P/E, P/B, P/S and EV/EBITDA.
Looking at the valuation multiples for the company, it seems obvious that it is relatively inexpensive company. All multiples are well below both the peer average and peer median.

– Growth and profit margin
In terms of profitability, Arkil is ranked among the top of its close peers, and well above the industry average and median. If we look at the profitability of the company, this is once again a point of relative strength;
however, there is a large variability within the sector. In terms of growth Arkil seems to be lagging behind its peers, with a geometric growth rate of 1.3% during the last five years against a peer average of 1.9%.

– Capitalization and return metric
Compared to peers, the company has a relatively high proportion of equity financing, this is an equity buffer is a desirable property to have in such a cyclical industry. Nevertheless, this capital structure has resulted in a lower ROE compared to peers.

Arkil - table4


In conclusion
At a DCF valuation with an up side at 99,7% build up with a conservative estimations and the multiples analysis where Arkil seems relatively inexpensive refer to a expectation that Arkil may be a cheap and solid
Authors: Allan Gjerløv Jensen, Anders Bager Rasmussen and Christian Montes Schutte







Valuation of cBrain on the Danish market

cBrain is a Danish‐based IT company with headquartered in Copenhagen. They have a market value of 138mio DKK. cBrain creates software solutions for primarily 3 main areas: Member Administration and Services, Project Portfolio Management and Digital Management and Processing. cBrains product are today used in 9 Danish Ministry’s including the Prime Minister’s Office.

Historically, cBrains sales have on average been increasing over the past six years. cBrain pays dividends equal to a yield of 1% (2013) and seen in this light, the growth rates are very impressive and a rare sight in normal IT growth companies. The primary part of cBrain’s business is located in Denmark, but cBrain is doing promotion in Germany. If they are successful in Germany, it can mean increased sales and higher margins because software in general is easy to scale. The value of the expected German business is uncertain, so we have decided to make two
valuations. One of the Danish business alone and one of the possible German.

The Danish market
In our DCF analysis of the Danish part of cBrain, we assume that cBrain can maintain a growth on average of 11% in revenue over the next six years. This may seem high, but we believe that there is still good growth opportunities in Denmark, because cBrains products currently is being used in the ministries, and we believe it will serve as an endorsement for cBrains. We expect that they can maintain their margins and the depreciation and amortization is maintained proportional constant. We believe that this is a conservative estimate because of the scaling possibilities.

cBrain table 1

Based on the table above and a budget‐ and a terminal period, we arrive at the following value for the Danish part of cBrain.


cBrain table 2

The German market
In the last few years, cBrain has worked on entering the German market. In may 2012 cBrain made an important cooperation agreement with the large research organization Fraunhofer with the purpose of introducing the F2 system in the German market. cBrain are still spending significant resources to enter the German market. We have valued the German option using a DCF. The revenue and free cash flow estimated is listed below.

cBrain table 3

Notice, in the case cBrain successfully enters the German market, we believe the first revenue is collected in 2015 and is growing significantly until 2020. From the year 2020 we assumes a 2% long term growth rate. With a discount rate of 8%, the net present value of the German business is 460 million DKK, equal to 23 DKK per share in cB