VWAPY - Porsche Automobil Holding SE: Porsche AG IPO Will Unlock Incredible Value

Summary

• Likely in the first week of September Volkswagen AG will announce the IPO of Porsche AG.
• Porsche Automobil Holding SE is the controlling shareholder of Volkswagen.
• Volkswagen in heavily undervalued, but Porsche Automotive Holding SE even more.
• The IPO of Porsche AG will be a huge catalyst and one of Germany's largest ever.

One of my biggest surprises in my investment history is that this current opportunity exists. If you think about luxury goods and famous brands, then Porsche is certainly a name that pops up. Mother company Volkswagen AG ( VWAGY ) ( VWAPY ) has a whole bunch of different brands and is severely undervalued. The top end of the range for the IPO of Porsche AG (the manufacturer) is about $85 Billion, valuing the rest of Volkswagen at almost 0. Absurd of course, so this will absolutely unlock value and for Porsche Automobil Holding SE ( POAHY ), or short, Porsche SE, even more so than for the Volkswagen Group itself. Really, where is the Reddit army?

Company Overview

As always, let's start with how Morningstar sums up Porsche SE:

Porsche Automobil Holding SE is an automotive holdings company. The company's core investment is a controlling stake in Volkswagen AG. Through this stake, Porsche SE has an interest in passenger and luxury car manufacturers which include Volkswagen, Audi, SEAT, SKODA, Bentley, Bugatti, Lamborghini, and Porsche; motorcycles under the Ducati brand name; and commercial vehicles under Volkswagen Commercial Vehicles, Scania, and MAN. In addition to the automobile manufacturers, this core investment provides Porsche Automobil exposure to the Volkswagen Financial Services financing business. Porsche SE also has a minority stake in technology company INRIX, a company that provides connected-car services and real-time traffic information.

Source: Morningstar

The description is pretty spot on. The main portion of value of Porsche SE is its 31.9% ownership of Volkswagen AG, but with 53.3% of the voting rights it is the controlling party of Volkswagen. Besides this the company has some other investments. For this write up I will pay no attention to those and consider them of zero value for this thesis. This holding company is half owned (but with 100% voting right, so the ones you can buy are without voting rights) by the Porsche-Piëch family. To a certain degree this setup looks like how the Agnelli family behind Fiat (now part of Stellantis ( STLA )) have control of their listed holding company, Exor ( EXXRF ).

So to summarize, Porsche SE as a company is about 1/3th of Volkswagen, but with full control. And you get in bed with the founding family by buying a piece.

Now how has it done over the last ten years?:

Besides the dividends, pretty awful. Of course there was a diesel scandal, a pandemic, the ongoing transition to electric cars, chip shortages and now high energy prices. But this has all created the opportunity that there is now.

To explain the opportunity, I'll first have a look at how Volkswagen is valued at the moment. Then Porsche SE and finally how it would look like after the IPO of Porsche AG. Since the EUR and USD are trading at near parity, the difference in currency does not matter that much in the figures.

Something to consider is the fact that both Volkswagen AG and Porsche SE have their primary listings in Frankfurt, Germany. For investors looking for more liquidity or with a preference for trading in EUR, this might be a better option than the ticker mentioned at the start of this article.

Valuing Volkswagen AG

At the time of writing, Volkswagen has a market cap of about $85 Billion. That's pretty much equal to the upper range of what Porsche AG is valued at for its IPO, but Porsche equals about 3.5% of the revenue of Volkswagen. I would say that it is safe to assume that everyone here knows Volkswagen. Under the umbrella of the group there are many well-known names such as Volkswagen, Audi, Lamborghini, Bentley, Ducati, Skoda and Porsche. In terms of revenues it was the largest automotive company in the world in 2021 and in production numbers the number two, after Toyota ( TM ). By market cap it is however the fourth largest behind Tesla ( TSLA ), Toyota and BYD (OTCPK: BYDDF ). If there is a company comparable to Volkswagen, than no company comes as close as Toyota.

So let's go head-to-head:

So on some metrics Volkswagen scores better and on others, Toyota, but in most cases they do not differ that much. Worthy of note is that both companies have huge financing divisions/banks - to finance buyers of their products, for example. The amount of debt isn't that scary since they are hybrid financial institutions in a way. Personally, I find cash flows highly important to determine the actual value of a company. Here, Volkswagen has a clear advantage to Toyota. But this is only recently; many prior years the advantage was held by Toyota. Now to put a price on Volkswagen. Based purely on the numbers, I would give it the same value as Toyota. That would mean a fair value of about $205-210 billion at the moment. One could even argue that Volkswagen has more desirable brands in its stable. But for this exercise we claim them equal in value. That would mean an undervaluation of Volkswagen of about $120 billion.

Valuing Porsche SE

Unlike Volkswagen, Porsche SE is more straightforward in how to value. As a holding company it might be worth above all to see what it is holding. So what does the most recent balance sheet, in EUR, look like?:

Some liquidity in the form of current assets that more than offsets all the liabilities. So there is a net cash position of about half a billion. Other than that it is basically just the investment in Volkswagen. Which they also state themselves:

So valuing Porsche SE in a very simple manner would be 31.9% of the market cap of Volkswagen plus half a billion for the net cash. This simple sum would be about $27.5 billion. I won't give a premium for the controlling voting shares that Porsche SE has in Volkswagen, nor a discount for the fact that the listed shares of Porsche SE are non-voting.

Now Porsche SE is trading at a market cap $22 billion, meaning a discount of nearly 20%. And that comes on top of the discount Volkswagen is trading at compared to its closed peer. If Volkswagen is valued equal to Toyota, the stake of Porsche SE would be worth $67 billion.

Unlocking value with the IPO of Porsche AG

It is safe to say that the people calling the shots at Volkswagen (mainly the Porsche-Piëch family) also have noticed that the current valuation of the holdings is lacking. This can be in comparison to Toyota, but also when looking at what the Agnelli's have done with Fiat. They unlocked a lot of value by splitting the company into several pieces. Volkswagen already IPO'd a portion of its trucking division, Traton ( TRATF ) just like the Agnelli's did with CNH ( CNHI ) and Iveco ( IVCGF ). But this was hardly a success for Volkswagen with the price being cut in half.

The Agnelli's also gave their crown jewel a separate listing; Ferrari ( RACE ) and this clearly has been a brilliant move. Since that IPO in 2015 the share price has almost quadrupled and the iconic car company now trades at over 40 times earnings and has a market cap of over $35 billion.

Porsche AG has less profit margins and may not be as elusive as Ferrari, but produces a lot more cars per year. And with that, money. By listing Porsche AG, they hope to emulate this win and boost the share prices of Volkswagen and with that, Porsche SE.

So now, what will the IPO look like?:

This schematic was from before Porsche SE increased its holding in Volkswagen AG from 31.4% to 31.9%, but the rest remains the same.

So the shares of Porsche AG get split into voting ordinary shares and non-voting preference ones. Porsche SE will buy 12.5% + 1 share of the ordinary. For this Porsche SE will pay a premium of 7.5% over the IPO price.

12.5% of the non-voting preference ones will get sold at the IPO and the remainder will stay in the hands of Volkswagen. Volkswagen has stated to pay out 49% of the proceeds as a special dividend. So that also bankrolls the stake of Porsche SE for a large percentage.

As a shareholder of Porsche SE total economical ownership of Porsche AG after the transaction would thus be 36.425% as compared to 31.9% prior to the IPO. If the IPO happens at a $85 billion valuation, the value of Porsche AG for Porsche SE alone would be around $31 billion. Again at the current valuation of $22 billion for Porsche SE this does not sound bad at all.

Risks

As with any investment there are risks. The biggest risk for the short term would in my opinion be that the catalyst, the IPO does not happen. This could for example be due to worsening market conditions. One other that comes to mind is the energy crises in Europe. This could seriously harm production and come at great costs. However Volkswagen and Porsche have seen many hurdles since their creation. From a world war to the events mentioned before. It is apparent that the overall conditions are not perfect at the moment, but still this has helped create this opportunity.

Conclusion

Porsche SE is a discounted play on Volkswagen AG, which itself is also highly discounted compared to its nearest rival, Toyota. The Agnelli family has clearly shown the way in how to unlock value from their automotive conglomerate. Volkswagen is now following in those footsteps and will bring a legendary brand of sports car to the stock exchange. This creates a huge opportunity. With so much value likely being unlocked soon, Porsche SE is a definite 'buy'.

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