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MSc. Finance & International Business Team 2, Group 2 Corporate Valuation Kathrine Korsager Larsen: 281292 Advisor: Per Surland Morten Haldbo-Classen: 402387 Anne Gottfredsen: 280696 Mike Fontenot: 402559

Valuation of DSV December 2010

Aarhus School of Business 2010

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Table of Contents 1 Introduction ........................................................................................................................1 1.1 Problem statement.......................................................................................................................... 1 1.2 Structure ......................................................................................................................................... 1 1.3 Delimitations and assumptions ...................................................................................................... 2 2 Company description .........................................................................................................2 3 Strategic analysis ................................................................................................................2 3.1 Analysis of the external environment ............................................................................................ 3 3.2 Competition analysis ...................................................................................................................... 4 3.3 McKinseys 7S framework.............................................................................................................. 9 3.4 Product portfolio analysis ............................................................................................................ 13 3.5 SWOT analysis ............................................................................................................................ 15 4 Historical Financial Analysis...........................................................................................17 4.1 Historical Free Cash Flow Analysis............................................................................................. 17 4.2 Historical Revenue Growth Analysis........................................................................................... 18 4.3 Return on Invested Capital (ROIC).............................................................................................. 19 5 Estimating the cost of capital...........................................................................................21 5.1 Estimating the cost of equity........................................................................................................ 22 5.2 Estimating the cost of debt........................................................................................................... 24 5.3 Weighted average cost of capital (WACC).................................................................................. 24 6 Forecasting, Scenario Analysis, and Valuation .............................................................25 6.1 Guidelines and Assumptions........................................................................................................ 25 6.2 Base case Scenario: (Weighted at 80%)....................................................................................... 26 6.3 Best case Scenario (Weighted at 10%) ........................................................................................ 28 6.4 Worst case Scenario (Weighted at 10%)...................................................................................... 28 6.5 Final valuation.............................................................................................................................. 28 6.6 Sensitivity analysis....................................................................................................................... 29 7 Plausibility analysis ..........................................................................................................29 8 Conclusion .........................................................................................................................31 9 The negotiation day ..........................................................................................................32 10 The learning process.......................................................................................................32 11 References .......................................................................................................................33 List of appendix

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1 Introduction The transport company DSV is one of Denmark’s most successful international companies. DSV is

listed on the NASDAQ OMX Copenhagen, and is also included in the OMXC20 index as one of the

20 most actively traded shares. This lucrative company has managed to grow mainly through the

acquisition of several companies over the last few years. DSV has stated that in the future they will

focus on growing through the improvement of processes. Therefore it is interesting to analyse whether

DSV can keep up the good earning potential in the future and whether or not the current market price

of DSV matches their estimated future potential.

1.1 Problem statement

The purpose of this assignment is to determine the value of the Danish transport company DSV.

Based on the above introduction, the following problem statement will be examined:

Based on a going concern principle, what is the value of DSV, and is the company an attractive

investment?

1.2 Structure The foundation for this assignment is the Enterprise Discounted Cash Flow Model (DCF model). The

model values a company based on the discounted cash flows available to all investors of the company,

using the weighted average cost of capital to calculate the Enterprise Value. The market value of the

equity is then derived, by subtracting all claims of debt holders and other nonequity investors from the

Enterprise Value (Koller et al, 2010). A complete summary of the four-part process can be found in

appendix 16.The structure of the assignment will be summarized in the following figure:

Figure 1: Valuation process

The strategic analysis is done in order to understand and assess which internal and external factors

affect the earnings potential of DSV. This analysis will define and describe the current situation in the

market, and it will look into the future strategic elements in the industries that DSV operates in. To

cover the financial value drivers of DSV, an analysis of the historical financial statement is

incorporated. This historical analysis is important as it sets the direction for the forecast of future

estimates required for the final valuation of DSV.

Strategic analysis & Financial statement

analysis

Cost of capital &

Forecasting

Valuation of DSV

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1.3 Delimitations and assumptions

The assignment will analyze the consolidated financial statements of DSV from 2004 to 2009, and

also the quarterly reports released in 2010. It will not contain an assessment of the different

subsidiaries, but an overall review of the DSV group, addressed as DSV from now on. However to

supply the most accurate valuation, analysis will be divided into divisions when necessary.

Furthermore, it will not contain an analysis of the used accounting polices. Only where assessment of

these policies is necessary it will be mentioned. A real option approach is not defined as relevant in the

case of DSV and will not be used. It should be mentioned, that collection of data is included up until

19/11 2010. Further delimitations will be addressed where it is necessary.

2 Company description DSV is a global supplier of transport and logistics solutions and was founded in 1976 by 10

independent Danish haulers. The strategy of the company was to be asset light, a strategy that resulted

in a huge success, and gave DSV the opportunity to obtain a listing in the Danish stock exchange in

1987. The company has since achieved rapid expansion and international presence, predominantly

through a series of strategic acquisitions. The most important being Samson Transport (1997), DFDS

Dan Transport (2000), Bachmann (2004), Frans Maas (2006) and ABX Logistics (2008). The DSV

group now operates in more than 60 countries worldwide together with partners and agents. The

company offers local distribution, European road transport, air and sea freight within and between the

largest continents in more than 110 countries and last but not least solutions/supply chain management

within the European area (DSV.com).

3 Strategic analysis The purpose of the strategic analysis is to analyse the non-financial value drivers of DSV. Together

with the analysis of the historical financial statements, the strategic analysis will provide information

and insight into future earnings potential. Therefore, it is considered to be a significant variable in the

valuation of DSV. In the strategic analysis, the macro- and microenvironment of DSV will be

analysed. The analysis will begin with an assessment of the external environment affecting the freight

transportation industry along with the competitive environment of the industry. By doing this, an

identification of opportunities and threats for DSV will occur. The internal environment of DSV will

be analysed by looking into their core competences and by analyzing the individual business units.

The internal analysis will create an overview of the strengths and weaknesses of DSV, and these will

together with the opportunities and threats of DSV, finally be put into a swot model to summarize the

strategic analysis.

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3.1 Analysis of the external environment

The external environment is analysed using the PEST model. This analysis is a framework for

identifying macroeconomic factors and influences that can affect the freight transportation industry. It

is a useful strategic tool for identifying and understanding factors that may affect industry growth or

decline, attractiveness, and direction. The acronym PEST (Political, Economic, Social, Technological)

describes the four primary categories to be analyzed (Hollensen, 2007). Also, it should be noted that

these categories will vary in importance to a given company, market, or industry based on the goods

and or services they provide. This assignment will contain an analysis of the international freight

transport industry1 to determine what a PEST analysis can conclude about the direction of its future.

More specifically, focus is primarily on identifying factors affecting the value drivers of companies

involved in the industry.

The complete PEST analysis for the international freight transport industry can be found in the

appendix 1. The results of this analysis have been collected in Table 1 and are followed by a summary

analysis of its implications for DSV.

Table 1: PEST-analysis of the external environment

External factor Sub-factor Effect Effect on Industries

Political

Increased environmental regulation Long term desire for increased

international trade Recent protectionism concerns

Increased costs Increased opportunities Increased uncertainty

Negative Positive Negative

Economic Expected slow to moderate economic growth

Equivalent demand for services

Negative

Social-cultural Environmental impact concerns Increased costs and decreased revenue

Negative

Technological Improvements in innovation Improvements in efficiency

Decreased costs Decreased costs

Positive Positive

Political

DSV, with its asset light business model is less affected in some ways by changes in regulations. For

example, the costs to comply with new regulations that require more fuel efficient transport vehicles is

born by the subcontractors DSV employs. Though this may still translate to higher prices for DSV, it

does not however require the direct capital investment needed to upgrade thousands of transport

vehicles with each new change in regulation. In addition, as a result of its business model, policy

objectives by the EU regarding freight transport may affect DSV more dramatically than some of its

competitors. The EU is currently focused on significantly reducing the amount of freight transport by

road and increasing the use and efficiency of rail transport. This may disproportionately affect DSV

1 The PEST-analysis will contain a collective description of the environment for all of DSV’s three divisions

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due to the fact that its business structure is heavily dependent on road transport and has to date chosen

not to develop rail capacity (Europakommisionen, 2001).

Economic

The most important economic factor affecting DSV is economic growth. The overall health of the

global economy and the level of demand for international freight transport are directly related. The

outlook for the industry mirrors the outlook for global economic growth. The implications for DSV,

from a demand perspective, are the same as for the entire industry. Expected slow to moderate growth

in the global economy and trade volumes translates to equivalent expectations of overall demand for

the services DSV provides.

Social

The implications for DSV of current, social environmental concerns may well translate into very real

financial consequences. This is due to the percentage of DSV’s total revenue that comes from its road

division and the fact that one of the EU’s primary objectives is to significantly reduce the level of

freight transport by road.

Technological

For DSV the technology in the form of IT systems is of great importance. The possession of a superior

IT platform in the area of logistics is the primary reason companies decide to outsource non-core

competencies to a third party transport and logistics company (Hollensen, 2007). Furthermore,

superior technology provides for the opportunity of becoming and/or continuing to be the cost leader

within an industry. Technology can also be utilized further as a competitive strategy. For example,

there is evidence that DSV is attempting to implant and incorporate its proprietary IT platforms into its

customers and suppliers logistical systems. This can increase switching costs for a customer, which is

beneficial in an industry categorized by generally low switching costs and high levels of price

competition (DSV, 2009).

3.2 Competition analysis

Porters Five Forces will be used to analyze the competitive structure of the three industries that DSV

operates in. This framework developed by Michael Porter suggests that competition in an industry is

rooted in its underlying economic structure and goes beyond the behaviour of current competitors. The

state of competition in an industry depends upon five basic competitive forces, as shown in appendix

2. Together these forces define the profit potential in an industry, and profit is measured in terms of

long-run return on invested capital (ROIC). The aim of this competition analysis is to define which

positions DSV can take in the future, and defend it self the best against the five forces, or can

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influence them in their favour. The five elements are evaluated and analyzed in each of DSV’s

divisions, and thereby a description of three different industries will occur (Porter, 1980).

Table 2: P5F for the industries of DSV

Competitive force Factor Size of power (1-5)

Effect on (ROIC)

1. Bargaining Power of Suppliers Increasing due to consolidation and decreasing capacity

5 Negative

2. Bargaining Power of Buyers Decreasing due to lack of capacity

2 Positive

3. Potential entrants

Low barriers to entry 4 Negative

4. Substitutes

In-sourcing 1 Positive

5. Industry Competitors Intense rivalry

5 Negative

1. Suppliers

The bargaining power of the suppliers will be evaluated by defining the number of suppliers, the cost

of shifting between suppliers and by their level of differentiation.

Road division: The suppliers in this industry are European independent carriers. In 2009, as a

result of the financial crisis, many carriers were left with overcapacity problems and they had

to cut down on their assets to reduce capacity. Capacity in the market was further reduced as

the result many carriers declaring bankruptcy during that period. The affect of this was that

when the activity in the transport industry began to rise in 2010, a problem with lack of

capacity was created. This caused an increase in the prices of DSV’s suppliers and has

affected DSV’s cost negatively (DSV H1, 2010). The cost of switching between suppliers in

the road division is defined as being low because of the supplier’s lack of differentiation. The

bargaining power of the suppliers is currently considered to be high due current low levels in

market capacity.

Air&Sea division: The suppliers in this division are sea freight shipping companies and airline

companies. The division is defined by a small number of suppliers. In times of recessions,

these industries are also affected by a high level of consolidation, which increases the

bargaining power of the suppliers against their customers. In the market for sea transport,

suppliers such as Maersk Line, Hapaq-Lloyd and CMA CGM are main suppliers. In the market

for air transport companies such as Lufthansa, KLM, SAS and DHL are suppliers. Like DSV,

all of these companies, which have an asset heavy balance sheet, where affected by the

financial crisis, and had been dealing with low freight rates and overcapacity in 2009. To deal

with this imbalance in demand and available capacity, these suppliers removed capacity from

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the market by temporarily removing a percentage of their fleet vehicles from the market. They

did this by dry docking a number of their active cargo ships and grounding cargo planes. In

the market for transport via air, DSV has recently joint the Lufthansa Cargo Global

Partnership Program, where all major competitors are partners of the program (DSV.com).

This gives DSV the ability to service larger clients with this air cargo carrier, and DSV can

now be considered a truly global partner. This partnership creates better terms for DSV as a

customer in the future, but is not considered to be of high significance. The level of

differentiation and the costs of switching suppliers in this division are defined as low. The

divisions’ suppliers as a whole have a high level of bargaining power based on the small

overall number of suppliers and newly reduced capacity levels.

Solutions division: This area is differentiated from the two other divisions. The suppliers are

here defined as owners of warehouses and suppliers of material for DSV’s logistics

operations. We define the bargaining power the warehouse suppliers as currently being low

due to large vacancy rates in the commercial warehouse industry (colliers.dk/international). In

the suppliers for material, for instance IT, the switching’s cost can be high, which means that

the bargaining power of these suppliers is considered to be moderate (O’Brien & Marakas,

2009).

2. Byers

The bargaining power of the buyers is evaluated by defining the concentration of buyers, the costs of

shifting between services and the opportunity of backwards integration.

Road division + Air&Sea division: The customers can be multinational or local customers,

small or big. Therefore there are a lot of different customers, which generally would mean low

bargaining power. However, the decrease in demand and overcapacity created by the financial

crisis allowed buyers to put pressure on prices in 2009 (DSV, 2009) In 2010 however, a

combination of the previously described actions by suppliers to reduce capacity in the markets

and new increases in demand reduced the barraging power of buyers (DSV Q3, 2010). Their

bargaining power currently considered being low due to increased demand and lack of

capacity.

Solutions division: The customers here are production companies who need storage of goods

and companies who need tailored logistic solutions. After the financial crisis many companies

followed the trend of inventory destocking. Additionally, with continued uncertainty about the

direction of the future economy, many companies are watching costs more closely making the

decision to outsource more difficult to justify. Therefore we consider the bargaining power of

these customers to be high.

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3. Potential entrants

The threat from potential entrants is defined by evaluating the capital requirements, economies of

scale and switching costs in the industries.

Road division: In this industry there are low barriers to entry. It is possible to have an “asset

light” strategy and outsource the physical transport. In this way there are no significant capital

requirements and no large fixed costs to undertake. Because of the internalization of European

markets, there are also no significant barriers to creating a transport company in a different

market. This combined with fact that this is an industry characterized by low switching cost

and low levels of differentiation, further lowers the barriers to entry.

Air&Sea division: In this industry the barriers to entry are also low, and no capital

requirements or economies of scale are a necessity, as leasing and outsourcing is a possibility.

Furthermore, the switching costs in the industry are defined as low. This is why the air&sea

industry is easy to enter, as most of the existing players in this market lease or outsource the

transportation.

Solution division: In this division there are barriers to entry, in the form of high capital

requirements to buy IT, network & know how. The threat of new entrants is therefore low.

4. Substitutes

The presence of substitute products can reduce attractiveness and profitability in an industry, because

of their constraint on the price levels. The road division and the air&sea division are each other’s

substitutes. Because most transport companies master both these forms of transportation, the

significance is considered to be low. Like DSV a lot of transport companies do not offer railway

transportation. This is therefore considered to be a substitute in the industries of road transport as well

as air and sea transportation.

Generally for all three industries the use of “in sourcing” by large industrial companies can be

considered as a substitute. If large companies use a solution in the “hierarchy”2, they will make their

own logistic solutions, and have no need to use a transport company. Although this is an option, the

possibility for a general trend towards this “in sourcing” is not considered to be high. Most companies

choose to focus on their core competences and choose a solution in the market or the hybrid for the

rest (Hollensen, 2007).

2 Transaction cost theory, where a solution in the market, the hybrid or the hierarchy is used.

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5. Industry Competitors

If the rivalry among the existing firms in an industry is high, it makes the industry unattractive

because of the potential low profit margins. This is the case especially in industries where competitors

are of the same size (Lynch, 2006). The rivalry among the existing firms in the three industries will be

described by defining the degree of differentiation and the market growth. Also a concentration index,

the Herfindahl index will be used to describe the competitive environment (Lipczynsky, 2009)3:

s = market share of firm i in the industry N= number of firms

Road division: The industry for transport of goods by road is very fragmented, because of the

more than 587.000 competitors of almost same size (Eurostat, 2010). Numerous competitors

of equal size and the lack of a clear leader4 will lead to more intense rivalry (Hollensen, 2007).

The Herfindahl index of 0,0019≈0,19%5 confirms this, and indicates a low concentration,

which means, that the industry for road transport is highly competitive. According to appendix

3, the 7 largest road freight transport companies represent a market share of only 8.75% of the

total industry, and no company has a market share above 4%6. The financial crisis of 2009 has

created a lower demand for road transport, and thereby created a stop in the growth of the

European road transport industry (DSV, 2009). Slow growth will tend towards greater rivalry,

so this is also a reason for defining this industry as being very competitive. The degree of

differentiation in this industry is low, as the service of transporting freight by road is difficult

to differentiate.

Air&Sea division: The industry for transport by sea & air, are industries with a lot of small

competitors and a few large. This is shown in appendix 3. The Herfindahl index of the sea

industry is: 0.078≈7.8%7 and the index for air is 0.029≈2.9%8. Thus these industries are

unconcentrated and the competition is therefore affected primarily by dominant players who

set the agenda. The differentiation in these industries is low which encourages competition

(Hollensen, 2007). The industries have been dealing with low freight rates since the global

financial crisis, and also a significant decreases in the volume transported. These are all

factors that will tend towards greater rivalry. The general economy in these industries has

3 The Herfindahl index is a measure of how concentrated an industry is. An industry with few competitors will have a high level of concentration, while many competitors in an industry will result in a low concentration. The Herfindahl Index (H) ranges from 1/N to one. Equivalently, if percents are used as whole numbers, as in 75 instead of 0.75, the index can range up to 1002, or 10,000. - A HHI index below 0.01 (or 100) indicates a highly competitive industry - A HHI index below 0.1 (or 1,000) indicates an unconcentrated industry - A HHI index between 0.1 to 0.18 (or 1,000 to 1,800) indicates moderate concentration - A HHI index above 0.18 (above 1,800) indicates high concentration - A small index indicates a competitive industry with no dominant players. If all firms have an equal share the reciprocal of the index shows

the number of firms in the industry. When firms have unequal shares, the reciprocal of the index indicates the "equivalent" number of firms in the industry.

4 A clear leader is defined as being at least 50% larger than the second (Hollensen, 2007)5(1,0091%)2+(0,8895%)2+(1,2455%)2+(3,7910%)2+(1,0072%)2+(0,2212%)2 +(0,5841%)2= 0,00191366 The market shares can vary due to statist deviations and accessibly to accounting numbers from enterprises within the sector 7 (1,0634%)2+(05,0738%)2+(5,4749%)2+(26,0740%)2+(6,2709%)2+(1,2152%)2 +(0,9236%)2= 0,078 8 (2,4128%)2+(10,3077%)2+(4,9338%)2+(11,1261%)2+(5,4974%)2+(1,5867%)2 +(1,4284%)2= 0,029

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been affected by the crisis, and has therefore created lower growth expectations in the future,

compared to the high level of growth before the crisis.

Solutions division: The biggest players in this industry are illustrated in appendix 3, and it

shows that DSV is a small player. DSV has acquired competence and market share in this

division through acquisitions. This industry has, like the transportation industries, also been

under a lot of pressure for the last couple of years because of the financial crisis. Enterprises

have down sized their supply chain activities to reduce costs. The Herfindahl Index of

0.0112≈ 1.12%9 indicates that the solutions industry is an unconcentrated industry. The

industry is dominated by large players. The solutions industry is an industry where

competitors can differentiate from each other and the growth potential is big.

3.3 McKinseys 7S framework

To analyze the internal environment of DSV, McKinsey’s 7S Framework is used. The purpose of the

model is to show the interrelationship between different aspects of corporate strategy, and thereby it

shows how a company effectively can be organized (Lægaard & Vest, 2010). The different elements

in the model contribute to the overview of the company strategy. The model is shown in figure 1 and

used to define the strengths and weaknesses of DSV. The summary of these is shown in the SWOT

analysis.

Figure 1: McKinseys 7S Framework Source: Lynch, 2006

Shared Values: The shared values of the company

Strategy: The strategy that has been chosen in order to achieve the goals set up

Structure: The organizational structure Systems: Systems and internal processes

that optimizes the daily routines Style: The management style Staff: Motivating the staff and encourage

personal development Skills: Internal resources, skills and

capabilities

Shared values: DSV has four values that describe them as a company and what they are striving for.

The four values are: Trust, Pride, Solidarity and Courage. This could be a code of conduct of the way

DSV sees itself or wants to be portrayed now and in the future. These values reflect some points of

view for DSV. They work together as a team and are proud of the way they solve problems and

assignments. There is a lot of respect and flexibility in order to deliver the best possible solution to

their customers. These values of trust are something DSV is very proud of.

9(0,4958%)2+(3,0095%)2+(9,3320%)2+(3,7374%)2+(1,0034%)2+(0,1939%)2 +(0,9299%)2+(0,4694%)2= 0,01125

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Strategy: Two strategies will be described to state how DSV is operating.

Generic strategy: To describe the strategy of DSV Michael Porters competitive strategies is used.

Porter has described a category scheme consisting of three general types of strategies that are

commonly used by businesses to achieve and maintain competitive advantage. These three generic

strategies are defined along two dimensions: strategic scope and strategic strength. Strategic scope

is a demand-side dimension and looks at the size and composition of the market you intend to

target. Strategic strength is a supply-side dimension and looks at the strength or core competency

of the firm. The focus strategy can also be divided into either a differentiated focus strategy or a

cost focus strategy. DSV needs a competitive advantage to obtain growth and sustainable earnings

in the long run.

Figure 2: Generic strategies of Michael Porter Source: O’Brien & Marakas, 2009

Following statements are written in the DSV annual report of 2009;

1. “DSV is constantly changing, pursuing a strategy of expanding its position among the leading and most profitable transport businesses in Europe. DSV's future expansion should be created through organic growth, acquisitions and mergers.”

2. “DSV also focus on extending customer relationships, strengthen international position,

engage the best partners and vendors, organizational growth, expand network worldwide and operate with global IT and logistics technologies.”

These statements indicate, that DSV is following an overall cost leadership strategy. This is

substantiated with the fact that the transport market is very fragmented and the prices are

standardized. The transport market is highly price sensitive and DSV therefore needs to focus on

their costs at all times to stay competitive in the market (Jacob Pedersen, Sydbank). DSV has

through their 2009 annual report shown the market (stakeholders) that they have successfully

reduced the cost base to stay competitive. DSV is, through the acquisition strategy, trying to gain

economies of scale, which will give them influence and thereby bargaining power toward their

subcontractors. DSV is efficient which give them a high asset turnover especially with respect to

their asset-light strategy where they primarily use subcontractors for their transportation activity

Strategic advantage Low costs Unique product

Cost leadership DSV

Differentiation

Mar

ket

Industry wide Particular segment only Focus

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and only service around 5% of their activities with their own equipment. DSV is operating, as

earlier stated, in a standardized market and this requires a constant search for cost reduction in all

aspects of the enterprise (DSV, 2009).

Growth strategy: To state the growth strategy of DSV, we analyse how they manage to grow in

appendix 4. The DSV Group has used an integration growth strategy where they have acquired

transport enterprises like DFDS, Dan Transport, Frans Maas and ABX Logistics. They all had a

lower operating profit then DSV. DSV has paid a premium for the enterprises they have acquired

on top of the marked price and the primary reason for this, is that DSV hope to achieve synergies

between the enterprises in the long run, and thereby increased the value for the stakeholders

(DSV.com). DSV have through this horizontal acquisition strategy tried to gain economics of

scale which would give them the needed bargaining power toward their subcontractors. This will

also create synergies between the different activities in regards to administration, marketing and

sales. The growth rates for the DSV Group could not have been a fact through organic growth, but

there are some challenges like culture differences in the cross-border acquisitions, acquiring price

for the target company10 and unforeseen cost and effort for the acquisition. DSV has until now

shown the stakeholders that they have constant focus on cost reduction in all aspects of the

enterprise and operating profit (Jacob Pedersen, Sydbank).

Structure: There are three levels of management in DSV. One group level is the CEO Jens Bjørn

Andersen and CFO Jens H. Lund. DSV is divided into three divisions: Road, Air & Sea and Solutions.

They each have a divisional manager and in all three divisions the organizational structure is alike.

The structure is very flat and decentralized meaning that there is a management team in each country

where operations take place. The national companies have their own budget, which is monitored by

national managers and by the management of the division. The advantages of having a local team in

each country are the knowledge of a certain market and culture. They are able to monitor the

development in each country close and can adapt to changes. The decision process is short which also

creates an advantage for both the company and the customers (DSV.com).

Systems: DSV has focused on a new IT strategy that should optimize the processes throughout the

group. Each division or main activity should have an IT system. There should be one centralized IT

function in order to keep track of infrastructure and operations from the integration of Frans Maas and

ABX logistics. As said in the annual report of 2009: “The ability to integrate, develop and implement

new IT systems is key to the Group’s continued optimisation of business processes”. DSV is trying to

differentiate themselves from their competitors with the use of IT. One service they offer are a 24 hour

booking system online. This makes it easier and more convenient for the customers to place an order

10 Several event studies indicate, that the acquiring enterprises stakeholders don’t gain from the acquisition (Buckley, 95)

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whenever they have the need of doing so. They also have a track and trace system so the customer can

follow the order online anytime (DSV, 2009).

DSV is trying to integrate with their customers and offers to do the logistics for them. This means that

DSV and the customer will have to integrate their IT systems. There are both advantages and

disadvantages of doing so. The advantages are that the customers will be more dependent on DSV

since it is a quite complex process to integrate IT systems and therefore databases. The disadvantages

are security issues in relation to integrating, since the customer might have access to the DSV system

where they are not supposed to. Overall it is concluded that the advantages of locking in the customers

are greater than the disadvantages in this case (DSV, 2009).

Style: DSV wants to attract young ambitious people to come work for them. They also encourage

them to question the way things are done. CEO Jens Bjørn Andersen says: “Mountains can be moved

by questioning the established order of things”. This encourages a combination of a younger

generation to question the way things are done and also the experienced workers who know how to

implement the ideas. In previous years DSV has been focusing on growth through acquisitions but are

now shifting their focus to growth through improvement of best practices. The employees are a huge

part of this process and will also have the opportunity to determine how things should be done in the

future (DSV.com).

Staff: As said in the annual report of 2009: “DSV is a service provider and therefore affected by the

Group’s ability to attract and retain qualified and committed staff.” By the end of 2009 there were

21,280 people working at DSV. The number had decreased from 2008 where 25,056 people were

working there. This is due to the fact that DSV has reduced the Group’s total staff by approx. 20 %

since they took over ABX in 2008. It was not only caused by the acquisition of ABX but was also due

to the financial crisis. In the Corporate Social Responsibility code of conduct the staff is also

mentioned. The staff at DSV is a crucial factor for the future success and therefore it is important to

make sure to support the effort and energy the staff put into the work they are doing. DSV is working

with employee development and they also offer attractive terms of employment. The staff is also

considered one of DSV’s strengths and insurance that DSV is one of the best service providers of

transport in the future (DSV.com).

Skills: DSV has a history of growth through acquisitions, which has created experience within this

area. DSV has also gained a lot of knowledge about new markets where the target was in a market that

DSV did not yet cover. The management of DSV knows the company very well since DSV recruits

from within. Almost every top-executive in DSV started their own career in DSV or in a company that

was acquired by DSV (DSV.com). This means that the top-executives are very familiar with how

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2.

- liquidity

1.

? - liquidity

3.

$ + liquidity

6x 5x 4x 3x 2x 1x 0,5x 0,1x Relative market share

Mar

keds

væks

t %

High 5

Low

4.

= liquidity balance

things are done and which practices that need change. It also means that there is a lack of

diversification in the experience of the top executives11. The consequence of this can be a lack of

innovation in procedures but at the same time DSV encourages employees to make a difference as

described in Style.

3.4 Product portfolio analysis

The BCG model is used to describe DSV’s product portfolio in regards to market growth and the

relative market share. The model is widely used and very manageable for the user. The market growth

is used as a picture of how attractive the market is. The relative share describes how large a market

share of the company relative to its biggest competitor. DSV’s relative market growth reflects

different divisions competitive strength in the market. Depending on market growth and relative

market share the different divisions are inserted into one of four quadrants of the matrix: Question

Mark, Star, Cash-cow or dog (Hollensen, 2007)

Figure 3: BCG portfolio of DSV’s divisions Source: Hollensen, 2007+ own editing

Road division: This division is categorized as a question mark because of its low market share around

1 to 1.5% and a relative high market growth of around 5% per year. A business activity within this

category is normally characterized by high market growth and a relative low market share but this

market is highly fragmented according to Eurostat. The road division is the group’s main revenue

generator and represents around 47% of the revenue within the group. They are one of the top 3

transport enterprises within Europe (Eurostat, 2010 & DSV, 2009).

11 This is based on the assumption that they do not have any experience from companies other than DSV

Mar

ket g

row

th

5%

ROAD

AIR & SEA

SOLU-TIONS

14

Air&Sea division: The air division is categorized as a question mark because of its low market share

around 1 to 1.1% and a relative high market growth of around 7% per year. The DSV Group has

therefore invested heavily through the acquisition of ABX and joined Lufthansa Cargo Global

Partnership Program to achieve a higher market share. The air division has obtained a critical mass

but it’s still not among the top 10 air transport enterprises within Europe. The air division is one of the

DSV Groups most profitable business units and primary drivers of the future growth (Eurostat, 2010

& DSV, 2009). The sea division is categorized as a question mark because of its high market share

around 2.5% and a relative high market growth of around 7% per year. The DSV Group has achieved

this market share though the acquisition of ABX. The sea division has obtained a critical mass but it’s

still not among the top 10 sea transport enterprises within Europe. The sea division is one of the DSV

Groups most profitable business units and primary drivers of the future growth (Eurostat, 2010 &

DSV, 2009). The air&sea division accounts for approximately 43% of the revenue within the group12.

Solution division: Is categorized as a dog because of its low market share, which is around 0.5% and

a relative low market growth of around 3% per year. DSV should, according to the BCG matrix

model, consider divesting the solutions division. From our point of view it’s advantageous to keep the

solutions division because of other synergistic in relation to the other activities. The solutions division

earns around 11% of the revenue within the DSV Group, but the division could become a significant

driver of the DSV Group’s revenue in the future because the acquisition of ABX has given the DSV

Group a superior setup (Eurostat, 2010 & DSV, 2009).

Strategy: The DSV Group needs to invest in their Air, Sea and Solution Divisions if they want be

become one the leading and most profitable transport businesses in Europe and thereby fulfill their

strategy (DSV Road Division is one of the top 3 transport enterprises within Europe where the other

divisions are not even among the top 10 transport enterprises). DSV should focus on the Air & Sea

Division because of a higher operation profit before special items (EBITA) in comparison to the Road

and Solution Division

12 The revenue is not divided in the annual report

15

3.5 SWOT analysis

The SWOT analysis will summarize and tie up the external and internal factors affecting DSV. It will

then be assessed if DSV possesses the needed strengths to exploit the opportunities and to resist or

minimize the consequences of those threats (Hollensen, 2007).

Table 3: SWOT analysis

Strengths Weaknesses Asset light strategy No rail Acquisition expertise No sustainable competitive advantage Extensive network Decentralized management

Opportunities Threats Expansion of Solutions Division Consolidation of suppliers Expansion into railway Intense rivalry and low differentiation

Regulations decreasing freight transport by road

Negative/Low economic growth Environmental impact concerns

Strengths

Asset light strategy: An asset light strategy enables DSV to adjust their costs in response to

changes in the economy and changes in demand. This strategy also allows DSV to avoid large

capital investments required as regulations and technology change over time.

Acquisition expertise: DSV has gained the knowledge and experience to successfully achieve

growth through acquisitions.

Extensive network: DSV has established an extensive road transport network allowing them to

service a large geographical market.

Decentralized management: DSV’s decentralized management allows for fast, localized

market assessments and adaptations.

Weaknesses

No rail capability: DSV has no rail capability. This may cause problems for them in the future

where rail is expected to grow in importance to the future of freight transport in Europe.

No sustainable competitive advantage: DSV does not appear to have any sustainable

competitive advantages that could not be acquired by their competitors.

Opportunities Expansion of Solutions Division: The expansion of the solutions division with emphasis on customer

growth provides greater opportunities in the other divisions simultaneously. This is based on the theory

16

that one new customer in the Solutions division likely has a need for the services provided by both the

Road and Air& Sea divisions. However, one new customer in either Road or Air & Sea does not

necessarily have a need for the services of the other two divisions.

Expansion into rail: The expansion into rail could provide additional sales opportunities that are not

currently available to DSV.

Threats

Consolidation of Suppliers: The consolidation of suppliers poses a threat to DSV because it

reduces the number of suppliers, which effectively reduces DSV’s bargaining power. This is

important because DSV’s cost leadership strategy relies on its bargaining power with

suppliers.

Intense rivalry and low differentiation: Intense rivalry in an industry where there are low

levels of differentiation and switching cost puts pressure on profit margins.

Regulations decreasing freight transport by road: DSV’s road division is a major source of

revenue. Any regulation aimed at decreasing freight volumes by road will have a negative

impact on DSV’s revenues.

Negative/Low economic growth: Demand for DSV’s services is highly correlated to economic

growth. Analysis of DSV’s historical financial statements shows that negative/low economic

growth has significant, negative impact on DSV’s revenue.

17

4 Historical Financial Analysis It’s essential to get an overview of a company's historical performance in order to assess its ability to

generate value for its shareholders. Together with the strategic analysis, the historical financial

analysis provides a basis for future expectations and the forecasting of DSV’s future performance.

The annual report of DSV is created according to IFRS standards. Therefore it is not directly

applicable for the valuation of the company, and a reorganization of the company's financial

statements is needed. The reformulated statements are provided in appendix 5, 6 and 7. In most annual

reports of listed companies return on assets (ROA), return on equity (ROE) and cash flows generated

from operations (CFO) are stated and calculated. These figures however can be "biased" by non-

operating factors and this is why reorganization should be undertaken prior to analysis. The basis for

the financial analysis comes from the annual reports for 2004-2009.

4.1 Historical Free Cash Flow Analysis A company's ability to create value for the stakeholders is not directly reflected in the company's

financial results but in the amount of the free cash flow it is producing. The FCF is independent of

financing and non operating items which can be thought of as the after tax cash flow available to all

investors, equity and debt holders.

Table 4: Development in NOPLAT & FCF excl. goodwill

Mio. DKK 2005 2006 2007 2008 2009 NOPLAT 800 1.249 1.354 1.799 1.086 Free Cash Flow excl. Goodwill 168 (2.316) 1.615 (1.404) 2.627

The development in the FCF can be misleading and therefore needs to be compared with the gross/net

investment rate because companies can increase the FCF by postponing investment in future growth.

DSV has experienced high growth in both NOPLAT and the FCF from 2005 till 2008. The increase is

due to large investments in future growth. Important investments include the acquisition of Frans

Mass in 2006 and the acquisition of ABX Logistics in 2008. DSV has experienced a decrease in

NOPLAT in 2009 which is due to a decrease in the net income from operations and postponed

investments in future growth in 2009. This helps to explain the increase in the Free Cash Flow from

2008 to 2009.

Table 5: Gross investment rate & Net investment rate

Percentage 2005 2006 2007 2008 2009 Gross Investment Rate 83,3% 246,7% -1,0% 163,8% -62,0% Net Investment / NOPLAT 79,0% 285,4% -19,2% 178,0% -142,0%

18

4.2 Historical Revenue Growth Analysis

Understanding DSV’s potential for growing revenue in the future is critical for the valuation and

strategic assessment. To put the long-term growth rates into perspective we analysis the historical rates

and divide the growth into four different drivers according to Koller et al, 2005. The drivers are

organic growth, acquired growth, currency growth and growth due to accounting methods. DSV has

not changed accounting methods since 2004, which is the reason for not including this element in the

growth analysis (DSV, 2009). The analysis is shown in table 6. Approximately 88.5% of the revenue

comes from operations within Europe, which gives a minor currency effect of around 0.4% on average

over the past 6½ years. This is an insignificant level but over time there have been fluctuation of

around +/-2.5% (calculations based on DSV, 2009).

Table 6: Revenue growth in DSV

Growth in revenue 2004 2005 2006 2007 2008 2009 201013 CAGR ´04 -´10 Organic growth % 6,4% 11,4% 7,1% 3,4% 4,2% -25,3% 13,8% 3,0% Acquired growth % -2,9% 15,0% 31,4% 6,3% 5,1% 24,1% 3,1% 11,7% Currency effect % -1,2% 0,8% 0,3% -0,6% -2,0% -2,5% 0,9% -0,6% Revenue growth % 2,4% 27,2% 38,9% 9,2% 7,3% -3,7% 17,8% 14,2%

The above table shows the revenue growth for the past 6½ years, which clearly states that the growth

comes primarily from the acquisition of enterprises rather than organic growth. Both organic and

acquired growth rates are imbedded in the DSV Group strategy. DSV is targeting an annual organic

growth rate of 3-10% per year for the different divisions (DSV, 2009). But with an average organic

growth rate of 3% according to the table, DSV is struggling to achieve this level of organic growth.

DSV is reaching an average revenue growth of about 14.2% due to the acquisition of enterprises. The

question is, if this strategy is sustainable in the long run. DSV has to continue acquiring enterprises to

obtain this future growth rate.

To break the revenue growth down even further into the different divisions, the revenue of the last

three years for each of the three divisions is portrayed in figure 4. DSV Road is still the largest

division but Air & Sea is closing the gap between the two divisions with Solutions being the smallest

of the divisions.

13 Data from 2010 is taken form the interim financial report, third quarter 2010

19

Figure 4: Revenue based on divisions

4.3 Return on Invested Capital (ROIC)

To understand DSV’s operating performance and which aspects of the business are responsible for

overall performance, it’s essential to state the key driver of value: Return on Invested Capital. ROIC

expresses DSV's ability to generate returns in the core business activities. ROIC is independent of the

debt structure and other items which are not targeted for core activities. As shown in the figure 5 the

ROIC of DSV is shown excluded Goodwill because this is a better measure for DSV’s performance.

From the ROIC tree figure, it is noticeable that ROIC14 has been declining since 2005 due to

acquisitions of Frans Mass in 2006 and ABX Logistics in 2008. DSV has gone from a ROIC

of 20.4% in 2005 to 8.4% in 2009. These large acquisitions have increased assets15 which has

effected ROIC negatively over the period. The figure shows the DuPont-model or ROIC-Tree

and gives a more detailed overview of the drivers of overall performance. This is undertaken

to clarify historical developments and determine whether or not this overall performance is

sustainable in the long-run.

Pre-tax ROIC is also declining from 28.9% in 2005 to 13.7% in 2009. The operating tax-cash

rate is low in the years where DSV is acquiring a large enterprise and it has also been affected

by the decrease in the Danish tax rate for enterprises (gone from 28% to 25%).

Revenue/Inv. Capital has also been decreasing from 588.2% in 2005 to 277.8% in 2009 which

means that DSV isn’t turning over the Invested Capital as quickly as before. This decline is

once again due to the large acquisitions (Frans Mass in 2006 and ABX Logistics in 2008)

where DSV bought the enterprises along with Goodwill and the overall perspective of

achieving synergies between DSV and the acquired enterprise that will lead to an overall

increase in profits.

14 We comment on ROIC excl. goodwill 15 PPE and account receivables from goods sold are amongst the assets increased

20

Revenue/Inv. Capital could have decreased even further but the operating margins have had a more

modest development from 2005 to 2009 where the margins are at the same level of 4.9%. The

operating margin from 2007 to 2008 were around 5.6% to 5.8% which is due to DSV outsourcing

activities to subcontractors and only performing 5% of the revenue activities with DSVs own

equipment. The Revenue/Inc. Capital can be improved even further by trimming the balance sheet –

divestment of subsidiaries, activities and PPE not related direct to DSV core activities (Road, Air &

Sea and Solutions) but DSV has one non-current asset in the form of Goodwill which strains the

Revenue/Inv.capital ratio.

Figure 5: ROIC tree

21

DSV has been able to increase the Gross margin from 20.3% in 2005 to 24.7% in 2009. Staff costs

have been increasing but Costs of goods sold has been decreasing which is the reason for the increase

in the Gross margins since 2005. The model below clearly emphasizes this development in the Gross

margin at DSV.

Figure 6: Gross margin

DSV has experienced a negative development in ROIC since 2005 which can be explained by the

acquisition of Frans Mass in 2006 and the acquisition of ABX Logistics in 2008. These acquisitions

have decreased the Revenue/Inv. Capital because of large investments in off cause assets but also

Goodwill which has increased the investment rate considerably. DSV has been able to increase this

Gross margin at the same time and thereby shown the stakeholders that they are able to acquire

transport enterprise and improve the performance over time which is very important. If DSV wants to

improve ROIC they need to trim the balance sheet of subsidiaries, activities and PPE not related direct

to DSV core activities (road, air&sea and solutions) which strain the Revenue/Inv.Capital ratio.

5 Estimating the cost of capital The weighted average cost of capital (WACC) is the estimated cost related to debt and equity. This is

the opportunity cost that the investors take, if they want to invest in DSV instead of another stock with

similar risk (Koller et al, 2005). The WACC is calculated from following equation:

WACC =EV* rE +

DV* rD * (1− Tc )

In the following paragraph it will be discussed how the different variables in the WACC formula are

estimated.

22

5.1 Estimating the cost of equity

In order to determine the costs of equity, the Capital Asset Pricing Model (CAPM) was used16. CAPM

is used for estimating the expected return of any security. In order to estimate the expected return, the

risk free rate, the beta of the security and the market risk premium will be used. The CAPM model

looks as follows:

E(Ri) = rf + βi [E(Rm) – rf ]

The expected return is not observable which is why historical data are used in order to determine the

expected return.

1) Estimating the risk free rate

In order to estimate the risk free rate, the government default free bonds are used. The bond

used should be denominated in the same currency as the free cash flows. When valuing a

European company the German Eurobond is preferred but there are also other factors to keep

in mind. The bond used should be denominated in the same currency as the free cash flows.

DSV denominates their free cash flows in Danish kroner, which is why we use the Danish 10

year zero coupon bonds instead of the Eurobond. Ideally, the maturity of the bond should

match each cash flow but in order to simplify, a bond that matches all the cash flows is used

instead. In this case a 10 year bond is preferred, since a 30 year bond is more illiquid than a 10

year bond. To incorporate the future estimate of the risk free rate, we brought in the estimates

of the interest rate in the future. According to Vismandsrapporten of 2010, the interest rate in

2011 is estimated to be is 3.3% (dors.dk).

2) Estimating the beta for DSV based on the industry beta

To improve the precision of the beta estimated, we calculated our own industry based on a

peer group analysis. Because DSV is operating in different industries, the beta given by Stern

was not accurate enough. To estimate the beta we used historical regression data. We chose a

peer group including three companies, DSV, Kuhne and Nagel, Deutsche Post. The companies

were chosen from the criteria that they had to be in the same industries as DSV. The return on

each stock was regressed on the return of the Morgan Stanley Capital International index17

(MSCI). The model used to estimate the return is the market model:

Rit = αi + βiRmt + εit18

The returns are exchanged into DKK using exchange rates from the exact point of time. We

regressed return on the peer group on daily, monthly and yearly data. The results are

illustrated in appendix 8. Koller et al, 2010 recommends the use of monthly data since the 16 We could have used other models such as Fama and French or Arbitrage pricing theory 17 We use this index because it is valuated and more diversified than e.g. the OMXC20 index 18 Koller et. al, 2010

23

usage of shorter periods lead to systematic biases. Bloomberg recommends weekly data and

Daves et al, 2000 recommends daily data. We used weekly data including 2 years of weekly

data, because these betas had the highest R2, and there graphs did not show any systematic

changes, as to the daily and monthly data.

Table 7: Raw beta of DSV

T

h

e

A

A company’s beta is a function of the operational and financial risk it undertakes. If a

company is highly levered, this is reflected in the betas as the shareholders take on more risk.

Therefore, to compare only operational risks of the companies, the effect of leverage is taken

out. The following formula was used:

βU =βE

(1+ DE)

Raw beta for each company is unlevered by the debt to equity value ratio and thereby we have

the unlevered beta. In order to find the industry beta, the median of the betas in peer group is

used and thereafter re-levered with the debt equity ratio, illustrated in table 8.

Table 8: Relevered DSV beta

2005 2006 2007 2008 2009 2010

Industry beta 0,70 0,74 0,68 0,71 0,76 0,79

DSV relevered 0,79 0,89 0,81 1,04 0,96 1,05

The market risk premium is estimated as the spread between the market rate and the risk free

interest rate: Market risk premium= rm-rf. Koller et al, 2010 suggest the market risk premium

to range between the 4.5% and 5.5%. Since the risk free rate is low at the moment compared

to historical data, an estimate of 5 % is chosen. The risk free rate is forecasted to range

between 3.4% and 3.7 %, which is why 3.5% was chosen19. The risk free rate is based on the

Danish bonds at 3.3 %. Now that we have estimated the factors included in the cost of equity

model we can estimate return on equity20: Return = 3.5% + 1.05*5.5% = 9.28%

19 Appendix 12 20 Based on 2010 numbers

2 year daily data 2 year weekly data 5 year monthly data

Beta 0,95 1,31 1,17

SE Beta 0,07 0,14 0,21

Upper 95% 1,06 1,73 1,66

Lower 95% 0,78 1,18 0,83

R2 0,26 0,52 0,38

24

5.2 Estimating the cost of debt The cost of debt before taxes rD is the interest rate DSV pays to take on debt. The cost of debt is

calculated by using the market rate and adds a credit spread determined on the maturity of the debt.

(Koller et al, 2010). DSV carries debt denominated in EUR and in DKK and the interest structure is

based on the spot rates for the German zero coupon spot rates and the Danish zero coupon spot rates.

The calculations are based on the book value of debt given in the annual report 2009. The cost of debt

was determined using following approach.

1) Determining average maturity of the debt: The approximate expiry dates of the debt are given

in the annual report21

. The mortgage loan, assumed in DKK, is 2.09 % of the long term debt

with an average maturity of two years. The loan is due in 2010-2014 which is why an average

of two years is used. 72.86% of the total long term loans have an average maturity of three

years and are determined in EUR. Finally 25.05 % is a bank loan determined in DKK and has

an average maturity of three and a half years.

2) Investment grade rating: DSV does not have an investment grade rating but the Danish

investor relation union rated DSV a BBB- in 2010 (dirf.dk). In appendix 9 the credit spreads

are given. The credit spreads are determined by the credit rating and the maturities of the

loans. The cost of debt for each kind of debt in DSV is listed as follows:

Table 9: Cost of debt

5.3 Weighted average cost of capital (WACC) Now that we have both the cost of equity and the cost of debt, the WACC can be calculated. We used

the D/V from 2009 to forecast the D/V for the future. This will therefore work as the target capital

structure in the future. DSV acquired ABS Logistics in 2008 and are now focusing on bringing their

debt down. Since it is it difficult to estimate how much the debt is going to decline, we keep the

capital structure fixed at 37% in the forecast.

21 Note 22 in the annual report 2009

Average maturity (Years) Currency

Percentage of total long term

debt

risk free rate

Credit-spread

interest rate

rD before

tax 2 DKK 2,09% 1,50% 1,50% 3,49% 3,68% 3 EUR 72,86% 1,91% 1,65% 3,56%

3,5 DKK 25,05% 1,74% 1,74% 4,03%

25

Table 10: Estimation of the WACC

2004 2005 2006 2007 2008 2009 2010--> r_f 4,49% 3,60% 4,15% 4,69% 4,68% 3,85% 3,50% Beta (industry) 0,790 0,79 0,89 0,81 1,04 0,96 1,05 Risk Premium 5,50% 5,50% 5,50% 5,50% 5,50% 5,50% 5,50% Cost of equity 8,84% 7,95% 9,04% 9,17% 10,42% 9,13% 9,28% Cost of debt 3,25% 3,27% 4,20% 5,10% 4,60% 3,00% 3,00% D/V 21,52% 17,47% 28,53% 27,45% 57,33% 37,00% 37,00% T 30,00% 30,00% 28,00% 28,00% 25,00% 25,00% 25% WACC 7,42% 6,96% 7,32% 7,66% 6,42% 6,59% 6,68%

6 Forecasting, Scenario Analysis, and Valuation The valuation of DSV, like all valuations, is associated with some uncertainty. It requires making

forecasts and assumptions about a yet to be determined future. Accordingly, it makes sense that some

consideration should be given to possible alternative futures. This can be accomplished with a scenario

analysis. A scenario analysis provides the framework for changing key estimates and assumptions

based on different future scenarios. In this analysis we attempt to combine assumptions and

conclusions from both the strategic and historical financial analyses and their associated effects on

future revenue growth.

6.1 Guidelines and Assumptions

2010 revenue growth is based on the most recent interim financials released by DSV, the quarterly

report of October. Revenue for 2010 is estimated to increase by 17.78% compared to 2009. This is

very high and we believe it is a result of DSV recovering from the financial crisis and is considered to

be a catch up rate. This high growth rate will affect our valuation, and should be taken into

consideration. Each scenario analysis describes economic and competitive conditions for the short

term explicit forecast period consisting of the years 2010 to 2014. Individual line item forecasts for

each scenario are provided in the appendix 10. For the explicit forecast period from 2015 to 2025, the

forecasted revenue growth rates are based on a gradual decrease from our 2015 estimate until they

reach the level of our expected growth rate of NOPLAT in perpetuity (This is the case for all three

scenarios). Continuing Value is estimated using the key value driver formula below:

CV =NOPLATt+1(1−

gRONIC

)

WACC − g

26

Justifications for our estimates of the required inputs are as follows:

1. NOPLATt+1: Net operating profit less adjusted taxes in the first year after the explicit

forecast period.

2. g: Expected growth rate in NOPLAT in perpetuity. Estimated for DSV to be 3% based on

the assumption that a company cannot expect to have continuous long term growth rates

in excess of long term GDP.

3. RONIC: Expected rate of return on new invested capital. Estimated for DSV to be equal to

WACC based on the fact that we do not see that DSV has a sustainable competitive

advantage and we expect competition will eventually eliminate abnormal returns.

4. WACC: DSV’s weighted average cost of capital and is based on our calculation.

The continuing value Estimates will be held constant for all three scenarios.

Our strategic analysis has determined that DSV is operating in an industry that is highly correlated to

the global economic environment. Therefore, our scenarios are based primarily on the direction of the

future global economy and the ability of DSV to obtain growth in that environment.Because DSV uses

a cost leadership strategy, reducing costs allows DSV to offer more competitive prices which translate

to increased customers and increased revenues. Therefore, we consider cost savings to be an integral

part of future growth estimates.

6.2 Base case Scenario: (Weighted at 80%) The base case scenario describes the overall business environment under current expected economic

and competitive conditions. In this scenario, we hold constant current competitive and economic

forces and their associated impact on ROIC and Growth as previously described in the strategic

analysis. The base case scenario is illustrated in appendix 13.

Road Division: In the road division, DSV is focused on the implementation and optimization of their

IT systems in order to deliver their services more effectively. The ability to integrate IT systems from

acquired companies with those of DSV will optimize DSVs business processes in the future and

thereby support the reduction of costs. The innovation and efficiency improvements in technology of

the industry will create opportunities for DSV continuing to cut costs and thereby further support their

cost leadership strategy. Analysis of the most recent numbers released by DSV shows that the growth

in the road division for the first 6 months of 2010 has increased by 3 % compared to the same period

in 2009. In the third quarter, the growth for road was 5.5 % compared to third quarter of 2009. For the

road division, we use the estimated growth rate in the Euro GDP as a barometer of demand and

guideline for future organic growth potential. The growth in the European economy is estimated to be

1.7 and 2.0 percent for 2010 and 2011 while the long term growth rate is expected to be approximately

1.5 percent. Due to rising activity in the transport business and the improved strength to exploit

27

opportunities, we forecast that DSV will be able to grow at a rate greater than the rate of the economy.

We conclude that the average annual growth rate of the road division will be approximately 5%.

Air&Sea division: The air and sea division has benefitted from the acquisition of ABX in 2008. This

acquisition has provided the essential elements required for future organic growth in the air and sea

industries. In addition, the acquisition gives DSV a bigger market share in air and sea which should

translate to improved bargaining power with its suppliers. The fact that DSV recently joined the

Lufthansa Cargo Global Partnership program also means that they have the opportunity to service and

focus on larger clients. For the air and sea division, we use the estimated growth rate of Global GDP

as the forecast of future demand and organic growth potential. Global GDP is forecast to be 4.8 and

4.2 for 2010 and 2011 with longer term estimates between 3.2 and 3.6 percent. Our assessment of the

air and sea division leads us to believe that it can also grow at a rate greater than what is expected for

the overall economy. The Air Division has grown by 30% for the first nine months of 2010, compared

to the same period last year .The Sea division has grown by 20% compared to the same period last

year. Both divisions outperformed the market in general, which shows great potential for the

combined Air & Sea division. However, we believe these high rates include a catch up rate associated

with recovery from the financial crisis and do not expect these high growth rates to continue. Based on

the combined analysis of the division’s historical financial performance and the current and expected

market share and growth rates from the BCG model in our strategic analysis we forecast an overall

growth rate of 7% for the air and sea division.

Solutions division: In the solutions division, DSV is attempting to integrate their IT systems with

those of its customers in order to optimize processes and provide more value added customer service.

As discussed previously in the strategic analysis, there is growth potential in the solutions industry but

since DSV is such a small player and the fact that there is still over capacity in this market and

continued customer concerns with respect to carrying excess inventory, we estimate their short to mid

term growth potential to be moderate to low. The growth rate for the first nine months of 2010 in the

solutions division was approximately 3% and we do not predict any significant increase in the near to

midterm future. We forecast growth in the solutions division to be 3%.

Overall growth rate

To get to an overall growth rate of the three divisions, we weight each division’s contribution to total

revenue in 2010 and end up with an overall base case growth rate of 6%22.

22 5%*0,46+7%*0,43+3%*0,11≈ 6%

28

6.3 Best case Scenario (Weighted at 10%)

In the best case scenario there is a positive increase in global economic growth. With this we would

expect an increase in demand causing a decrease in industry capacity which should translate to higher

prices and higher revenues. In this scenario, we forecast global GDP to increases by a rate of at least

1% allowing for DSV to grow organically at a rate of 7%. Additionally, in the best case scenario DSV

will be successful in completing another large acquisition. Historically, DSV has been able to obtain

an acquired growth rate of 11.2% on average according to our calculations but we have a more

conservative estimate of future acquired growth of 5.6%. The argument for the conservative

estimation is that we cannot be sure that DSV will be able to achieve similar levels of success with

future acquisitions like they have had in the past. We therefore estimate a combined revenue growth

rate of 12.6% with the growth fading out from 2015. The best case is illustrated in appendix 14.

6.4 Worst case Scenario (Weighted at 10%)

In the worst case scenario there is a new global economic recession in 2012 with associated credit and

liquidity crisis. In this scenario we would expect demand to fall creating excess capacity and a

resulting decrease in prices and revenues. We expect the slow growth in the economy to increase

competitive rivalry in the industries and further affect DSV’s ability to increase revenue growth.

Additionally, we would predict that DSV will not be able to obtain growth from acquisitions due to

difficulties in obtaining the capital necessary to complete them. To determine growth estimates in the

worst case scenario we reference DSVs historical organic growth rates. As a result of the crisis, DSV’s

organic growth decreased by approximately 25% in 2009. For the explicit forecast period in this

scenario we adjust our base case scenario and forecast revenue growth to be -20% in 2012 followed by

10% in 2013, and 3% in 2014. The worst case scenario is illustrated in appendix 15.

6.5 Final valuation

Following table contains the estimated share prices from each of the three scenarios and a final share

price based on the weighed average. It shows, that the weighted share price does not deviate

significantly from the share price in the base case.

Table 11: The weighted average of the stock price

Scenario Weight Stock price Best case 10% 210,94 Base case 80% 147,20 Worst case 10% 104,18 Final stock price 149,27

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6.6 Sensitivity analysis

The sensitivity analysis is constructed in order to determine the effect of the most significant factors to

the value of DSV. The analysis will be done using the base-case scenario, since this is the scenario

with the highest probability.

Table 12: Sensitivity of the value due to changes in key parameters

Factor %Δ in value per share -1% -0,5% 0,5% 1% ROIC -11,17% -5,14% 4,42% 8,26% Risk premium 21,17% 9,99% -8,96% -17,05% Rf 20,20% 9,56% -8,62% -16,44% RD 3,90% 7,98% -3,72% -7,29% RE 20,04% 9,48% -8,55% -16,30% -0,1 -0,05 0,05 0,1 β (industry) 10,48% 5,09% -4,81% -9,37%

The share price of DSV is very sensitive to the components included in the WACC. This is the case,

because all the cash flows from the forecasting are discounted back with the same discount rate. The

value is also very sensitive to our choice of risk premium. Therefore we see that the choice of a 1%

lower risk premium can lower or value of DSV by almost 22%.

7 Plausibility analysis A multiple analysis that compares DSVs multiples with those of its similar competitors can be useful

to test the plausibility of the DCF value. It can explain mismatches between DSVs performance, and

those of its competitors, and support useful discussions about which companies the market finds

strategically positioned to create more vale than other. The purpose of this analysis is therefore to

determine if DSV is under- or overvalued of the market compared to its peer group (Koller et. al.

2010). Three requirements are important when carrying out this analysis:

1. Use the right multiples: Forward-looking multiples are used, as it is the future value of the

company that determines the value today. For most analyses the EV/EBITA and the ratio of

P/E is widely used. The value of EBITA was though not possible to subtract from Datastream,

so a ratio of EV/EBITDA was used instead. When using the P/E ratio, factors like capital

structure, nonoperating losses and gains affect the calculations, and should be taken into

account. The effect from leverage can therefore affect the use of this ratio, and should be

taken into account (Koller et. al 2010).

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2. Calculate the multiples in a consistent manner: As our numbers are form Datastream, we will

ensure that this is done. Furthermore, to calculate the multiples a harmonic average was used.

In certain situations, especially situations involving rates and ratios, the harmonic mean

provides the truest average (Baker & Ruback, 1999).

3. Chosing the right peer group: The companies to use in this analysis should have similar long

term growth and ROIC. As the peer group of DSV only contains 2 competitors this is not

done. Therefore it must be considered as a bias when concluding on the analysis (Koller et. al.

2010).

Table 13: Value based on multiple analysis

Forward looking estimates from Datastream P/E 2010 P/E 2011 EV/EBITDA 2010 EV/EBITDA 2011 DSV 19,42 15,03 10,59 8,91 Peer group Kuhne & Nagel 24,55 20,75 13,13 11,12 Deutsche Post 9,75 10,37 5,34 4,74 Multiple 13,96 13,83 8,38 7,26 Standard error 39,14% 8,69% 26,34% 22,71% Value per share based on peer group multiple Shareprice 83,18 106,48 70,54 74,91

The stock prices calculated from the multiple analysis are below the stock price calculated in the

scenario analysis of 149,27. The table also indicates, that the DSV stock is overvalued. The stock

prices are most similar to the worst case scenario. The deviations can come from the fact, that the peer

group is to small and also biased. Therefore a conclusion on the plausibility based on the peer group

multiple analysis cannot be done.

Instead of relying on the results from the plausibility analysis, a comparison with ratings from major

banks is included instead, and is shown in appendix 11. The target price calculated for DSV is still

above the target price of the banks, but still seems realistic. This is why we evaluate that the result of

our analysis is still plausible.

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8 Conclusion The strategic analysis showed that the most important economic factor effecting DSV is the overall

economic growth. There is a direct correlation between revenue and overall economic growth

according to our analysis. The transportation sector is also characterized by being highly price

sensitive (homogeneous services/products) and also having a fierce competition due to relatively low

entry barriers. Also it is and highly fragmented with around 590.000 transport enterprises within

Europe. The fierce competition leads to low margins and therefore it is DSV’s strategy to pursue an

overall cost leadership strategy. DSV’s business model is based on the policy of having an asset light

strategy which enables them to adjust their costs in the response to changes in the economy and

changes in demand. According to our analysis DSV has no sustainable competitive advantages. They

have core competencies like there asset light strategy, acquisition expertise, extensive network and a

decentralized management which is the basis for their growth potential.

The financial analysis showed that the DSV has experienced a high growth in NOPLAT and FCF in

recent years due to large investments in future growth (Acquisition of Frans Maas in 2006 and ABX

Logistics in 2008). The growth in recent has been dominated by growth from acquisitions (CAGR ’04-

’10 by 11,7%) but DSV has a growth strategy of 3-7% within the different divisions. DSV has been

able to increase its gross margins although we have experienced a recession.

The expected development in economy and DSV’s ability to exploit their core competences are

incorporated in the forecast of DSV’s future cash flows. The cash flows is the foundation for our

valuation of DSV. We calculated a WACC of 6,68%, which was used as the discounting rate to the

expected future cash, flows. Under the base case scenario we have estimated DSV’s share price to

147,20 DKK. This estimation is associated with some uncertainty and therefore the estimation of

DSV’s share price is based on three scenarios, worst, base and best case scenario. A weighted average

of the scenarios gives an estimated share price of 149,27 DKK, which indicates that DSV's earnings

and growth potential is not reflected in the current market price. We hereby conclude that DSV is a

strong buy. The sensitivity analysis showed that the share price of DSV is very sensitive the

components included in the WACC. The comparison of DSV's multiple peer-group showed that DSV

is overvalued. Although we cannot draw an overall conclusion from this analysis, because the peer

group is to small and also biased. Instead a comparison with ratings from major banks were done, and

it indicated that our estimated share price is plausible.

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9 The negotiation day For the negotiation day we were selected to represent a buyer of DSV. We chose to be the UK based

CEVA Logistics. CEVA is owned by Apollo Management L.P., a private investment equity firm, which

has acquired Australian based TNT in 2007 and US based EGL in 2008 to create CEVA Logistics.

CEVA is today, one of the world’s leading integrated supply chain logistics companies and offers a

broad spectrum of services based on market leading contract logistics and freight management

expertise and capabilities. An acquisition of DSV would substantiate CEVA’s position as a leading

enterprise within global transport and logistics. CEVA brings superior processes to DSV Solution

Divisions while DSV brings new processes/activities though their road and air&sea divisions. Our

strategy was to focus on the process improvements and cost savings from a merger/acquisition – our

presentation is attached in the appendix 17. We negotiated with the sellers and discussed the different

assumptions before giving the seller our first bid for DSV. We had more or less the same numbers in

regards to WACC, beta and risk free interest rate for the base case scenario, but there were also some

difference like the overall growth rate for DSV where the selling team had included growth from

acquisitions and we did not. In SG&A, we had an exponential decrease because of cost savings from

eliminations of jobs, facilities and other related expenses that would result from the merger/acquisition

and the synergies created between DSV and CEVA. In the first round we offered the selling group 115

DKK per share. The selling team came with a counter offer in the second round of 140 DKK per share

based on their base case calculation price of 135 DKK per share + 5DKK per share in premium. This

was accepted because we had calculated a base case of 156 DKK per share at that time. We wanted to

achieve a win-win situation between DSV and CEVA Logistics.

10 The learning process The group came to the agreement, that the Corporate Valuation course has been one of the most

beneficial courses we have had in the MSc programme. The course ties all the different theories

together and we got to use our acquired knowledge from the past 1½ year. This assignment has, at the

same time, been more extensive than first anticipated. We have come to understand how to incorporate

internal and external surroundings to a strategic and financial analysis. We learned how to use these

results to estimate the value of an OMX C20 enterprise based on the McKinseys DCF-model. It has

given us a good insight into how to measure and manage the value of companies. We have also

learned, that we should not take anything for granted, because it is all down to the assumptions and the

model that we use for the valuation.

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11 References Books

Elling, Jens O., et al, 2005, Regnskabsanalyse og værdiansættelse, 2nd ed, Gjellerup

Hollensen, Svend (2007): Global Marketing: A Decision-Oriented Approach, 4th ed. Financial

Times Press

Koller, Tim, Goedhart, Marc & Wessels, David (2010): Valuation: Measuring and managing

the value of companies, McKinsey & Company

Lynch, Richard (2006), Corporate Strategy, 4th ed. Prentice Hall Financial Times.

Lypczinsky, John (2009), Industrial Organization, 3rd, Pearson

Lægaard, Jørgen & Vest, Michael, (2010), Strategi i vindervirksomheder, 3rd Ed.

Jyllandspostens forlag

O’Brien & Marakas (2009), Management Information Systems, 9th Ed., McGraw Hill.

Porter, M. E. (1980), “Competitive strategy, Competitive Strategy: Techniques for Analyzing

Industries and Competitors”, The Free Press

Annual reports

CEVA, 2009

DB Scheker, 2009

Deutsche Post, 2004-2009

DSV, 2009

DSV, 2004-2008

Kuhne & Nagel, 2004-2010

Logwin, 2009

N. Dentressangle, 2009

Panalpina, 2009

Reports/articles

Baker, M & Ruback, R., 1999, estimating industry multiples, working paper, Harvard

Business School

Europakommisionen, 2001: “Hvidbog- Den europæiske transportpolitik frem til 2010- De

svære valg”

DSV H1, 2010

DSV Q3, 2010

European Commission Transport,

European Commission Managenergy

Eurostat 2010: Eurostat Statistics in focus Transport 39/2010

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Eurostat latest report from 19.07.2010 on “Transport of goods by road”.

Euro stat Panorama of Transport, 2009

Eurotrends, 2010

Transport outlook 2010, OECD

World Bank Global Outlook, world IMF outlook, 2010

World Economic Outlook, 2010

Webpages

www.colliers.dk/international

www.dachser.com

www.dors.dk

www.dsv.com

www.geodis.com

www.kurstarget.dk

www.shareholders.dk