Coverage Initiation: Porsche AG

We initiate coverage of Porsche AG with a Reduce rating. After the initial craze following its IPO, we see the current value as reflecting the dichotomy between Porsche AG’s luxury and volume profiles – the Luxury one having yet to be proven. Porsche is a model of balance capitalising on its ties with VW Group and a sound balance sheet to front-run the EV transition. Governance is a dark spot and the Porsche AG aura may be short-lived should a sister brand like Lamborghini or Bentley) be IPOed. 
Target Price 


Credit Risk 


Fundamental Strength 


Sustainability Score 


Independent Board 


87.6 


A 


9/10 


6/10 


No 




A quick look at the group’s structure
 

Porsche is a German automobile manufacturer specialized in high performance sport cars. Recently, the group successfully extended its product range with SUVs and sedans. The history of Porsche and Volkswagen Group (VW Group) have been closely entangled since 1931 but it was only in 2012 that Porsche AG became fully owned by VW group. 

In September 2022, Porsche AG was listed on the market with a 12.5% free float. Since then, VW Group has owned 75% while Porsche SE (the listed investment vehicle of the Porsche/Piech family and the largest shareholder in VW Group) has owned a direct stake of 12.5% in Porsche AG.


Porsche AG Share Price Momentum


A comprehensive product line-up 

The main difficulty with Porsche is determining where its cars are positioned in the market. The group offers a line-up of 6 models (ranked by date of launch): 1) the 911 a two-door rear-engine sports car vectoring the history of the group, and its image and knowhow in auto sport, 2) the 718, born in in the 1990s as an entry-level sports car aimed at broadening the group’s customer base, 3) the Cayenne the first SUV and certainly the saviour of the company in the early 2000s, having stepped-up volumes, 4) the Panamera, launched close to a decade later, offering a new body type in the form of a 4-door car half-way between a sports car and a comfortable sedan, 5) the Macan a baby Cayenne aimed at riding the fast-growing SUV trend with the same objective as the 718 compared to the 911 but more successful (Porsche delivers as many Macans as Cayennes but twice as many 911s as 718s), and 6) the Taycan, the group’s first foray into the Battery Electric Vehicle (BEV) market, with this 4-door sedan EV-native sedan launched in 2019. 

Alone in its market or fighting on all fronts? 

Some might see Porsche AG perfectly equidistant from everyone, and others would see this as a perfect balance. With selling prices ranging from c.€60k to hundreds of thousands of euros, a group ASP of c.€100k and annual sales of close to 300k units, Porsche AG is neither a high-volume premium OEM like BMW or Mercedes-Benz (both producing >2m units annually), nor a limited-volume luxury OEM like Ferrari or Lamborghini (owned by VW Group) and producing around 10k units annually. The luxury car segment is expected to outperform the car manufacturing industry. According to McKinsey, cars with a selling point of above €80k accounted for only 2% to 3% of the units sold in 2021, but the segment is expected to grow at a CAGR of 8%-14% through to 2031 versus only 1% for the rest of the industry. However, the segment is far from immune from global macro-economic trends and notably the level of disposable income. While the higher end of the range may prove to be more resilient and less price elastic than luxury goods, we believe that the volume/premium share of the range is more at risk of a recession-triggered demand slowdown. 

Renowned brand name as a key asset 

Like every high-end brand from Ferrari to Hermès, Porsche AG aims to maintain and enhance the value of its brands, and is capitalising on its decades-long history on roads, circuits and podiums. Based on Brand Finance’s 2021 brand value ranking in the luxury and premium category, the Porsche brand ranked number one of the top 10 including LV, Gucci, Chanel, Hermès, Ferrari, Rolex, Dior and Guerlain). While the latter ranking bears no relation with the group’s equity valuation, it does highlight the company’s ability to attract new customers and retain them over time.  

A pioneer in electrification but shifting the full range could be challenging 

Porsche was a front runner in electrifying the car industry with a first electrified model in 2010 (a hybrid Cayenne) followed by the launch of the Taycan (first 100% electric car) in 2019. At this time, Tesla already had 3 models in its catalogue (the model S, X and 3) but this was ahead of most legacy OEMs especially in the luxury segment where Ferraris and Lamborghinis have yet to enter the market. Porsche has also been a first mover into the 800 Volts battery technology (subsequently followed by Hyundai Group and Lucid) while most competitors, including Tesla, are using 400 Volts batteries. Still seen as a niche technology, the 800V system has supporters and detractors when it comes to its real advantages. On the plus side there is the higher charging speed and longer-lasting performance in demanding driving conditions while the critics point to energy loss at charging, faster battery deterioration with high-speed charging and high cost.  

Given the toughening regulation aiming at banning ICE cars (e.g in Europe with a ban scheduled for 2035) Porsche looks to be on the right track. The group is aiming to reach at least 50% of BEVs in its delivery mix by 2025 and over 80% by 2030. However, few details have been shared on how the group will shift its flagship 911 family and its iconic “flat-six” ICE engine to the EV world.  

A valuation running out of fuel 

Our DCF, SOTP and peer valuations derive only limited potential on the first, greater upside on the second and very little upside potential from the last. Our peer group comprises three companies with, in our view, the closest positioning to Porsche AG: Ferrari, BMW and Mercedes Benz. We apply a 50% premium on all the metrics to reflect the above-average positioning of the Porsche AG offer. Tesla’s equity story is far too singular to make it a relevant peer, at least as long as the Porsche transition towards electrification isn’t complete. Nor have we included the luxury sector companies in the peer group mainly because of the difference in terms of underlying drivers and markets. Nevertheless, we believe that the relative valuations are worth bearing in mind. Hermes, LVMH and Kering are good examples of valuation positioning when it comes to differentiating, luxury and upper end premium. 
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