POAHF - Porsche SE: Best Way To Own VW And Porsche AG

2023-08-22 17:47:37 ET

Summary

• Porsche Automobil Holding SE is a holding company with core stakes in Volkswagen and Porsche AG.
• We are drawn by the appealing fundamentals of the underlying holdings as well as the excessive holding discount which we believe should eventually narrow.
• We see at least 28% upside in Porsche SE shares.

We present our note on Porsche Automobil Hol ding SE ( POAHF ), a holding company containing stakes in carmakers Volkswagen and Porsche AG. We are drawn by the appealing fundamentals of the underlying holdings as well as the excessive holding discount which we believe should eventually narrow as the portfolio becomes less concentrated, net debt is reduced, and there is visibility on the legal issues. The stock is our preferred way to own VW and Porsche AG and is one of our top picks in the auto sector. We will provide a brief introduction of the company and lay out our investment case, valuation, and risks.

Introduction To Porsche SE

Porsche SE is a German holding company based in Stuttgart. Its core investments include 53.3% of the ordinary shares and 1.3% of preferred shares of VW, equal to 31.9% of the total equity of the company, and 25% of the ordinary shares of Dr. Ing. h.c. F. Porsche AG, equal to 12.5% of the total equity of the company. In addition, Porsche SE has a number of smaller growth-oriented portfolio investments in the fields of mobility and industrial technology which are generally held on a temporary basis. The shareholder structure of Porsche SE consists of 153.125 million ordinary shares owned by the Porsche / Piëch family equivalent to 50.0% of the equity, and 153.135 million free-float preference shares equivalent to 50.0% of the equity.

Porsche Automobil Holding SE is a DAX40 constituent.

More Than Just A Dividend Recycler

Porsche SE has historically had a very high concentration of investments in terms of numbers and industries, and the company has mostly served as a recycler of Volkswagen dividends, resulting in a market valuation at a hefty discount to Net Asset Value. With the acquisition of Porsche AG shares a major strong asset has been added to the portfolio and the company aims to further increase deal flow for promising growth companies diversifying its dividend inflows and generating additional shareholder value. Porsche SE has assumed debt to acquire its stake - which comes with a blocking minority and hence significant influence over the direction of Porsche AG - and moved from a net cash to a net debt position, also temporarily reducing its dividend-paying capabilities. We have a positive outlook on this second core investment, and we believe Porsche AG is headed for cash-generative growth and an over 50% dividend distribution policy.

H1 Results

Porsche SE reported H1 results with no surprises. Net income fell to €2.3 billion due to the base effect from VW which was affected by a positive one-off related to the revaluation of preference shares in H1 2022. The net debt of the group has fallen to €5.4 billion due to the receival of dividends from VW and Porsche AG. Meanwhile, guidance on net income and net debt ranges were maintained respectively at €4.5-6.5 billion and €5.6-6.1 billion.

Investment Thesis And Valuation

We apply a NAV-based methodology for valuing POAHF shares. At current market prices, Porsche SE’s stake in VW is worth €19.6 billion, and its stake in Porsche AG is worth €11.6 billion. Adding in €400 million for other stakes and subtracting €5.4 billion of net debt we arrive at a net asset value of €31.6 billion. We subtract an additional €4 billion for legal liabilities. This estimate is based on a number of sell-side analyst estimates and is closer to the middle of the range. We now arrive at a fair value of €27.6 billion or €89 per share. Applying a 30% discount in line with historical values (although we believe the discount should eventually narrow by a couple of percentage points) we arrive at a value of €63 per share or $68 per share implying 28% upside.

Alternatively, we value Porsche SE using a PE multiples approach. We expect €20 of EPS in FY2024e. We value the company at 5x forward EPS and arrive at a fair value of €100 per share. We subtract the amount for litigations – ca. €13.5 per share and arrive at a target price of €86.5 or $94 per share implying 76% upside.

Risks

Downside risks include but are not limited to a deterioration in macroeconomic conditions leading to lower auto demand, lower customer adaption of new products, geopolitical risks, technology risk, higher than expected capital expenditures need to transition to electric vehicles, legal risk ((PSE)) related to alleged share price manipulation of VW shares, legal risk (VW) related to VW emissions scandal, changes in capital returns policy related to the pass-through of VW dividends, an equity raise to lower/pay down debt, suboptimal allocation of capital to other portfolio investments, etc.

Conclusion

We recommend building a long position in Porsche SE shares. It is our favorite way of getting exposure to VW and Porsche AG “in the cheap” at a hefty holding discount which we believe should eventually narrow.

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