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 cBrain. The likelihood cBrain successfully enters the German market is very difficult to estimated. For the purpose of this valuation, we set the likelihood of success to 33%. In that case, the likelihood adjusted net present value of ‘the German option’ is 153 million DKK or 7,7 DKK per share.

Overall, we believe that cBrain has a fair value of 14.62 DKK. This provides a potential up side of 85%. This estimate is of course subject to some uncertainty, because of the German part of the business, while the Danish part is pretty certain. So our argument is, that we get the Danish business for a little over fair value and then we get the German part as a option, that can give a big potential up‐side.





Brdr. AO

Brdr. A & O Johansen
Brdr. A &O Johansen (AO) distributes and sells plumbing supplies and tools in Denmark (90% of revenue), Sweden and Estonia. In recent years the company has invested heavily in a new efficient warehouse, IT, newAO - table 1 stores and upgrades of existing stores. After weathering the financial crisis with minimal losses, the equity ratio, revenue, profits and book value have been rising steadily since. Today AO is in a strong position with high profits, low debt and a strong platform for future growth.

Strong management team
CEO and major stockowner is Niels A. Johansen, who is 3rd generation of the founder. CFO is Henrik Krabbe who is educated from INSEAD. We believe they make a strong management team with a combination of hands on experience and a strong theoretical background. Sometimes it can cause problems when the CEO is the biggest shareholder, because it
decreases the likelihood the CEO will be fired if he is incompetent, and increases the likelihood the CEO focuses on other goals that creating value for all shareholders. However we are not concerned this is an issue in AO because the chairman of the board is Henning Dyremose, former CEO and chairman of TDC. Dyremose has the experience and clout to be a strong chairman. Overall we are very pleased with the management of AO.

Ownership structure
The founding family controls 52% of the votes through Evoleska Holding AG and thus has full control over the company. Other major shareholders are Sanistål and Lemvigh‐Müller who also both happen to be competitors to AO. AO have not distributed profits to shareholders since the financial crisis and thus have significant financial flexibility today. The flexibility has been build up because AO expects to acquire own stocks from Sanistål who is under financial distress. We expect AO will put their financial flexibility to use in the future, either by acquiring shares from Sanistål or through dividends and share buyback programs.

The upside in AO based on a discounted cash flow (DCF) analysis is 50%, indicating the company is significantly undervalued. When comparing AO to other companies in their industry, AO also appears to be undervalued. AO is trading at almost half the P/E of the second cheapest company, has a P/B comparable to the distressed Sanistål and has the second highest equity ratio.

AO - table 2

Both measured in absolute and relative terms, AO looks significantly undervalued. In addition to the cheap price tag, we find the company to be of high quality in regards to management, financial strength and investments in the future. We have thus decided to invest in AO.