VWAPY - Porsche Automobil Holding SE: The Better Way To Invest?

2023-06-09 17:34:45 ET

Summary

• Porsche Automobil Holding SE, which owns significant stakes in carmakers Volkswagen AG and Porsche AG, trades at a significant discount to its NAV.
• Based solely on the company's core holdings, Volkswagen and Porsche AG, Porsche SE has a NAV of €31.2 billion compared to a market value of only around €16.9 billion.
• Despite the discount, Porsche SE is a hold rather than a buy due to the lack of a catalyst event to close the valuation gap and limited upside for Volkswagen and Porsche AG.

Porsche Automobil Holding SE ( POAHY ; POAHF ), the company through which the descendants of Ferdinand Porsche control Volkswagen AG ( VLKAF ; VWAGY ; VWAPY ; VLKPF ) and hold a significant stake in its listed subsidiary, Dr. Ing. h.c. F. Porsche AG ( DRPRF ; DRPRY ) directly, is frequently described as a better way to invest in the aforementioned carmakers. Indeed, there is a massive discount to NAV as well as other advantages compared to a direct investment. In this article, I will try to assess, what that means with regard to shares of the holding company.

A note regarding terminology: Following, I refer to the carmaker as “Porsche AG” and to the holding company as “Porsche SE”, respectively.

Holdings

The bulk of Porsche SE’s assets consists of two core holdings.

By far, the largest asset is a 31.9 percent equity stake in Volkswagen. They own 53.33 percent of the voting common stock ( VLKAF ; VWAGY ) - which trade at a premium to the non-voting preferred stock - as well as some preferred shares ( VLKPF ; VWAGY ). Based on the current share price, the position has a value of around €24.5 billion.

Additionally, Porsche SE holds 25.1 percent of Porsche AG’s common stock, representing a little over 12.5 percent of the latter’s equity. The common stock is not listed, but based on the value of the listed preferred shares, this position represents a value of about €13.4 billion.

There are also smaller holdings, which Porsche SE collectively refers to as “ portfolio investments ”. These had a combined reported value of € 101 million as of March 31 ^st . The relatively minuscule size of those positions means that they do not presently move the needle in any meaningful way regarding the company’s valuation. I like to think of them as a kind of “lottery ticket”, myself.

Debt

The purchase of the Porsche common stock required significant amounts of funds. That created the necessity to borrow around €7.9 billion. As of March 31 ^st , Porsche SE reported net debt (which, somewhat euphemistically, they refer to as negative “net liquidity”) of €6.9 billion. I believe that given its characteristics, the viability of Porsche SE’s debt load should not be measured against earnings but against dividends received from its core holdings.

Porsche AG plans to distribute around 50 percent of its after-tax profits from FY2023 (distribution in 2024). The after tax earnings (transferred to Volkswagen under a profit and loss transfer agreement in accordance with section 291 of the German AktG = stock corporations act; “Gewinnabführungsvertrag”) in 2022 were almost €4 billion, with 2023 on track to increase these numbers considerably based on Q1 numbers increasing almost 40 percent YoY. Preferred shares usually receive a slightly higher distribution, but I assume that Porsche SE should receive at least €300 million in annual dividends going forward. The 2023 dividend (For FY2022), is €1 per common stock, amounting to a little over €113.87 million.

Additionally, there is the dividend, that Porsche SE receives from Volkswagen AG, which amounted to around €1.4 billion in 2023. So, under the assumption of a more or less stable distribution - one should keep in mind that Porsche SE controls a majority of voting rights and therefore wields considerable influence regarding Volkswagen’s dividend policy – the dividends received from core holdings should suffice to cover net debt within 4 years.

Massive Discount

Based on the market value of its two core holdings (kindly note: the company itself values those assets at equity), Porsche SE has a NAV of about €31.2 billion. The total value of the company based on the current price of its listed preferred shares is about €16.9 billion. Thus, it currently trades at a discount of more than 50 percent to NAV.

The discount becomes even more evident when taking into account that - though Volkswagen – the economic interest in Porsche AG is just shy of 40 percent. Based on the current share price, that represents a value of about €43 billion. This theoretically means that considering the net debt of €6.7 billion one would get exposure to Porsche AG at more than a 40 percent discount - while getting the remainder of Volkswagen (well, 31.9 percent, anyway) and the non-core investments for free.

Valuation

So, what does that mean for valuation? Based on the massive discount, I would, in theory at least, have to come to the conclusion that Porsche SE is a better way of buying Porsche AG and/or Volkswagen.

Only the non-voting preferred shares are listed. All voting rights are controlled by the descendants of Ferdinand Porsche Sr., the Porsche and Piech families. Nonetheless, I see fewer conflicts of interest compared to a direct investment in either Volkswagen or Porsche AG. The (financial) interests of family and non-family shareholders are generally aligned. At Volkswagen, on the other hand, there may be conflicting interests of Porsche SE which given their majority of voting rights might lead to decisions and actions detrimental to other shareholders' best interests.

The alignment between controlling and third-party investors is particularly obvious with regard to dividends. The company’s dividends are the main source of income for the Porsche/Piech families. Hence, they are incentivized to prioritize distributions. This, in turn, benefits holders of the preferred shares who always get paid at least the same amount per share (historically the preferred shares received minimally higher amounts). For 2022, the company plans a stable €2.56 per preferred share (subject to shareholder approval), translating to a dividend yield of around 4.6 percent.

There is, however, one problem: Porsche SE has always been trading at a massive discount to its Volkswagen holding. While the respective share prices generally move in the same direction most of the time, this gap persisted. The direct stake in Porsche AG did not change that, so far. Neither do I consider it likely that it will, as being grouped together with a (much larger) stake in Volkswagen waters down the pure-play valuation of the Porsche AG investment.

From my point of view, there would have to be a catalyst event - for example, if Porsche SE were to meaningfully increase its stake in Porsche AG and/or reduce its Volkswagen exposure - for the discount to meaningfully reduce. As I do not expect such a catalyst in the foreseeable future, I expect the discount to remain. At the same time, I do not see much upside for either Porsche AG or Volkswagen from their current market values. In conclusion, I thus believe that Porsche SE is realistically a hold, not a buy (although it arguably should be one).

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