Royal Unibrew has undergone significant changes in recent years, evolving from a company primarily focused on operations in Denmark, Finland, Italy, and the Baltic countries with beer as its main segment, into a business with strong multi-beverage platforms across the Nordic region and an expanded presence in Western Europe. But does this transition make Royal Unibrew a compelling investment opportunity? This analysis will explore whether the company’s transformation signals the right time to invest in Royal Unibrew.
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Since attending the workshop with Phil Town, I have decided to make some changes to the layout of my analyses. I will perform additional calculations and also provide a brief explanation of why the company is significant to me. If you want to learn more about my company evaluation process, please visit the "MY STRATEGY" section on my website.
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The Business
Royal Unibrew is a brewing and beverage company headquartered in Faxe, Denmark. The company was founded in 1989 through the merger of the breweries Faxe, Ceres, and Thor under the name Bryggerigruppen. Bryggerigruppen later merged with the brewery Albani in 2000, and in 2005 the company changed its name to Royal Unibrew. Royal Unibrew provides a wide range of beverages, including beer, soft drinks, malt beverages, energy drinks, cider/ready-to-drink beverages, juice, water, and wine and spirits. The company is known for brands such as Royal Beer, Lapin Kulta, Cido, Faxe Kondi, Ceres, Faxe, Original Long Drink, Lāčplēsis, Vitamalt, Mangali, Novelle, Kalnapils, Egekilde, Supermalt, Polar Monkeys, Lorina, Shaker, Mokai, LemonSoda, Norhlund, Power Malt, Fonti di Crodo, Cult, Lahden Erikois, Vilkmerges, and Lielvārdes. Additionally, Royal Unibrew has partnerships with major companies like PepsiCo and Heineken, allowing them to produce and sell these companies' products in Denmark and other markets. They also distribute products from Diageo through a partnership. Royal Unibrew operates in three business segments: Northern Europe (including Denmark, Estonia, Finland, Germany, Latvia, Lithuania, Norway, and Sweden), Western Europe (including France, Italy, and the Netherlands), and International (covering more than 70 markets across the Americas, Europe, the Middle East, Africa, and Asia). Northern Europe is the company's largest market, contributing 78% of revenue, followed by Western Europe with 13%, and the International segment with 9%. In terms of product categories, carbonated soft drinks are the largest, contributing 34% of revenue, followed by beer at 29%, wine & spirits at 11%, cider & ready-to-drink beverages at 10%, energy drinks at 5%, water at 5%, malt beverages at 2%, and other products at 4%. Royal Unibrew's business is built on a solid foundation of strong local brands, which provide the company with its competitive moat.
Management
Lars Jensen is the CEO of Royal Unibrew. He joined the company in 1993 and has held various positions until he became the CEO in September 2020. He holds a Diploma in Business Economics, Informatics, and Management Accounting from Copenhagen Business School. Lars Jensen has expressed that he doesn't believe in centralization or top-down management. Instead, he trusts that local employees in the various markets where Royal Unibrew operates know more about their specific markets than he does. As a result, he believes that local management is better equipped to decide which products to sell in their respective markets. He sees his role, along with the rest of the top management, as focusing on making large strategic decisions rather than micromanaging local operations. Lars Jensen's commitment to this management style is demonstrated by his decision to leave Royal Unibrew for about 1,5 years when he felt the company was becoming too centralized, limiting the ability of employees like himself to propose ideas and solve problems as they saw fit. During his time away, he served as the CEO of a football club, Næstved Boldklub, for about a year, an experience he has described as invaluable. Under Lars Jensen's leadership, Royal Unibrew has made several acquisitions, and the company has doubled in size within the first four years of his tenure. Personally, I appreciate that Lars Jensen values decentralization—a philosophy endorsed by leaders like Warren Buffett. I also believe that Lars Jensen has the experience and strategic mindset needed to lead Royal Unibrew moving forward. His willingness to make large acquisitions to drive long-term growth further reinforces my confidence in his leadership. Thus, I am comfortable with Lars Jensen continuing to lead Royal Unibrew.
The Numbers
The first metric to investigate is the return on invested capital (ROIC). Our criterion requires a 10-year history with all figures exceeding 10% annually. For some reason, Finbox didn't have the numbers from 2014. Nonetheless, Royal Unibrew has delivered a ROIC above 10% in all the nine years we have data, which is impressive. It is also impressive that Royal Unibrew has delivered a ROIC above 20% in five out of the past nine years. ROIC has decreased in 2022 and 2023, and it is slightly concerning that ROIC reached its lowest level in the past nine years in 2023. However, there is an explanation for that, which is acquisitions. Royal Unibrew has made numerous acquisitions over the past couple of years, and many of these acquisitions have required investments in equipment and organizational capital, which has negatively impacted ROIC. Furthermore, both 2022 and 2023 have been affected by macroeconomic headwinds, which has also impacted Royal Unibrew. Thus, I believe that ROIC will increase in the future, and I expect it to top 20% again within a couple of years, as we won't see acquisitions at the same rate.
The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. I don't have the growth rate from 2013 as Finbox only provides data for the past ten years. Royal Unibrew has delivered mixed numbers in the past, but its equity has increased every year since 2017, which is encouraging to see. The significant increase in equity in 2022 and 2023 is largely due to acquisitions. During these two years, Royal Unibrew made several acquisitions, with the largest being Vrumona, which has boosted the company's equity. Nonetheless, I find the overall trend encouraging, even though I wouldn't place too much emphasis on the numbers from the past two years due to the impact of these acquisitions.
Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It is not surprising that Royal Unibrew has delivered positive free cash flow in all years over the past decade. Royal Unibrew has achieved its highest free cash flow in four of the past five years, which is encouraging. Acquisitions have impacted free cash flow over the past two years, which is why free cash flow reached a ten-year low in 2022. However, Royal Unibrew managed to increase its free cash flow again in 2023, where it reached its third-highest level in the past ten years, which is promising. The levered free cash flow margin has been at its lowest point in the past two years, largely due to acquisitions. Management has indicated that most of the acquisitions they have made are initially margin-dilutive, as Royal Unibrew's margins are positioned at the high end of the beverage sector. However, they expect that these margins will eventually align with the group's average margin over time. Consequently, the levered free cash flow margin may remain lower than usual over the next few years but should recover eventually. The free cash flow yield is currently lower than the ten-year average, suggesting that the shares are trading at a high valuation, though this is something we will revisit later in the analysis.
Debt
Another important aspect to consider is debt. It is crucial to assess whether a business has a manageable level of debt that can be repaid within a period of three years, which is determined by dividing the total long-term debt by earnings. Upon analyzing Royal Unibrew's financials, it is evident that the company has 4,63 years of earnings in debt. This is above the three-year threshold, indicating that debt is something that needs to be monitored. However, I'm not overly concerned, as the debt is primarily due to acquisitions, and management has mentioned that they are prioritizing debt repayment.
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Risks
Based on my findings so far, I believe that Royal Unibrew is an intriguing company. However, no investment is without risk, and Royal Unibrew also faces its fair share of challenges. One significant risk is commodity prices. Royal Unibrew, like many companies in the beverage industry, relies heavily on various raw materials such as barley, hops, sugar, aluminum (for cans), and energy sources. In fact, Royal Unibrew categorizes this risk as having a high financial impact and considers it likely to occur. The commodities that Royal Unibrew needs for its products are traded globally, making their prices subject to fluctuations based on supply and demand dynamics, geopolitical tensions, and other factors. When the prices of these raw materials increase, Royal Unibrew faces higher production costs. If the company cannot pass these increased costs on to consumers through higher selling prices, its profit margins and overall earnings will be squeezed. Furthermore, management has mentioned that while the impact of increasing costs due to climate changes and climate-related legislation has been limited so far, it is expected to rise in the coming years.
Macroeconomic factors also pose a significant risk to Royal Unibrew. The company has noted that higher interest rates and the rising cost of living have influenced consumer preferences, leading to reduced spending in bars and restaurants across most markets. Additionally, Royal Unibrew mentioned that consumers are spending less in supermarkets and are increasingly seeking out good deals, resulting in private label and discount products gaining a slight share of the total market. If we experience an extended period of low economic growth, it could further stagnate consumer spending, making it more challenging for companies like Royal Unibrew to increase sales and maintain their high margins. In such an economic environment, consumers may prioritize essential goods over discretionary items like beverages, potentially leading to declining sales volumes.
Competition is a significant risk for Royal Unibrew due to the intense price competition and heavy marketing efforts prevalent in the beer and soft drink markets. This competitive environment can put pressure on profit margins, as the company may be compelled to lower prices or increase marketing expenses to maintain its market share. The rise of private labels and discount brands further intensifies this challenge, particularly as consumers become more price-sensitive. Additionally, Royal Unibrew faces stiff competition from both global multinationals and strong local players, which can limit growth opportunities and increase market volatility. Moreover, the beverage industry is expanding, and the market is becoming more fragmented, complex, and sophisticated as consumer preferences and tastes evolve. To succeed in this competitive landscape, Royal Unibrew must continuously innovate, differentiate its products, and manage costs effectively. Failure to do so could result in declining profitability and market share, potentially jeopardizing the company's long-term growth prospects.
Reasons to invest
There are numerous reasons to consider investing in Royal Unibrew. One compelling factor is acquisitions. Acquisitions play an integral role in Royal Unibrew’s transformation, as they have always been a core part of the company's strategy to create value. Royal Unibrew has consistently created significant value through these acquisitions over time. The company categorizes its acquisitions into four types: Bolt-on acquisitions, which involve smaller businesses operating in areas where Royal Unibrew is already present through its multi-beverage model; Brand/category acquisitions, which focus on acquiring brands that provide exposure to new categories or expand presence in existing niche markets; Platform acquisitions, which involve acquiring businesses in markets where Royal Unibrew has limited or no presence; and Asset acquisitions, which involve acquiring additional production capacity close to consumers. Most of the recent acquisitions have been platform acquisitions. These types of acquisitions typically require a longer period to realize synergies compared to other types, which tend to materialize more quickly. However, historically, platform acquisitions have provided the most significant value creation over the long term. Therefore, these acquisitions could accumulate substantial value for Royal Unibrew over time.
Partnerships. Royal Unibrew has significantly expanded its partnerships in recent years. For instance, they have taken over the sales of PepsiCo's snack portfolio in Norway, Sweden, and Finland (already a partner in Denmark), as well as its beverage business on the border between Denmark and Germany. Additionally, they have extended their partnership with Diageo. The profitability of these partnerships varies depending on whether they are solely based on distribution or also involve production, sales, and marketing. Typically, partnerships are dilutive to margins, which may not be appealing to all investors. However, the capital employed in these partnerships is generally low, making the return on invested capital very attractive. Moreover, these partnerships enhance Royal Unibrew's product portfolio with strong brands, which further support the sales of Royal Unibrew's own products. As a result, these partnerships are likely to benefit Royal Unibrew in the long term.
Royal Unibrew has identified six focus areas for its long-term strategy: energy drinks, enhanced water, cider/ready-to-drink (RTD), no/low sugar products, no/low alcoholic products, and premiumization. All these areas are expected to grow structurally faster than the average beverage market, with most also expected to generate higher profit margins than Royal Unibrew’s current average. For instance, Royal Unibrew launched CULT as the energy drink for the Norwegian market, which has quickly gained a strong market position. The energy drink category grew revenue organically by 5% in 2023, a notable achievement given that energy drinks are among Royal Unibrew's most profitable categories. In the cider/ready-to-drink category, Royal Unibrew introduced a new Original Long Drink variant with pineapple in Finland. This launch not only strengthened the market position of the Original Long Drink but also expanded the cider/RTD segment in Finland. The no/low alcoholic segment (beer, cider, and RTD) saw an 8% increase in volume from 2019 to 2023, compared to a 4% decrease for regular and strong alcohol-containing products during the same period. Similarly, the volume growth in no/low sugar alternatives (soft drinks, water, and energy drinks) outpaced regular products, increasing by 11% from 2019 to 2023, while regular products grew by 7% in the same period. These figures demonstrate the popularity of both segments among consumers. Finally, management expects that premiumization will contribute a 1% to 2% positive impact on earnings per share (EPS) annually.
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Valuation
Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators.
The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 21,90, which is from 2023. I have selected a projected future EPS growth rate of 11%. Finbox expects EPS to grow by 11,1% a year in the next five years. Additionally, I have selected a projected future P/E ratio of 22, which is twice the growth rate. This decision is based on Royal Unibrew's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be DKK 338,16. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Royal Unibrew at a price of DKK 169,08 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 1.777, and capital expenditures were 602. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 421 in our calculations. The tax provision was 311. We have 50,053 outstanding shares. Hence, the calculation will be as follows: (1.777 – 421+ 311) / 50,053 x 10 = DKK 329,90 in Ten Cap price.
The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With Royal Unibrew's Free Cash Flow Per Share at DKK 23,48 and a growth rate of 8%, if you want to recoup your investment in 8 years, the Payback Time price is DKK 309,09.
Conclusion
I believe that Royal Unibrew is an intriguing company with strong management. The company has a moat through its strong local brands. Although ROIC has decreased over the past two years, this is mainly due to acquisitions, which have also impacted free cash flow, particularly the levered free cash flow margin. Both ROIC and the levered free cash flow margin are expected to improve in the future. Royal Unibrew's business is heavily dependent on commodities, which is why the company categorizes high commodity prices as a risk with a high financial impact that is likely to occur. Management also anticipates that the impact of rising costs due to climate change will increase in the coming years. Therefore, it is important to be aware that any increase in commodity prices will affect Royal Unibrew's profitability. Macroeconomic factors also influence Royal Unibrew, as higher interest rates and increased living costs have altered consumer preferences, leading to reduced spending at bars and restaurants, as well as in supermarkets. Competition is another significant risk, given the intense price competition and heavy marketing efforts in the beer and soft drink markets, which can pressure profit margins. Thus, competition remains an ongoing risk for Royal Unibrew. On the positive side, Royal Unibrew has historically created significant value through acquisitions, and its recent "platform acquisitions" are expected to accumulate value for the company over the long term. While partnerships may come with lower profit margins, the capital employed in these partnerships is low, making the return on invested capital very attractive. These partnerships also support the sales of Royal Unibrew's own products, which should be beneficial as the company continues to expand its partnerships. Finally, Royal Unibrew has identified six focus areas that are expected to grow faster than the average beverage market and generate higher profit margins than the company’s current average. These focus areas could potentially make Royal Unibrew more profitable in the future. Overall, I believe there are many reasons to be optimistic about Royal Unibrew, and that it could be a good long-term investment at a price below the Ten Cap value of DKK 329.
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