PORSCHE AG OR SE? THE IPO TOOLKIT

Porsche’s customers are used to choosing the finish of their 911s. With an IPO of Porsche AG profiling for the coming weeks/months, investors will have the opportunity to choose the finish of their Porsche investment: AG or SE? Buying into the IPO looks too expensive above the €75bn mark, but buying into the HoldCo, Porsche SE, would offer a discount narrowing for free as we expect the HoldCo to become a proxy investment for Porsche AG.

Fact

Latest rumours around Porsche AG's IPO

• Investor roadshows would be due to end on Friday, 16 September, leaving room for “discussions over the weekend before opening the book-building process early next week”, reported Reuters.
• Porsche AG’s capital would be split into 911m shares with reference to its flagship car. Pushing symbolic figures further could foresee a €71.8-91.1 per share pricing range with reference to the Porsche 718 and 911 models (pure speculation from our side).
• The discussed pricing windows range from €65-85bn for the widest, to €70-80bn for the narrowest.

Agreed structure of Porsche AG's share capital and voting rights

Key figures

• Porsche AG’s outlook FY22: revenue €38-39bn; RoS 17-18% / mid-term: revenue 7-8% CAGR; RoS 17-19% / Long-term: RoS >20%
• Porsche SE agreed to acquire 25% + 1 ordinary shares of Porsche AG (i.e. 12.5% of the total share capital) at a 7.5% premium to the IPO price of the pref. shares (i.e. the free-floating shares).
• VW group plans to distribute 49% of the proceeds of the IPO through a extraordinary dividend payment in early 2023.
• What does a €70bn IPO imply? VW Group would raise €18.2bn and pay a DPS of €17.8, Porsche SE would need to finance a net €6.6bn.
• What does an €80bn IPO imply? VW Group would raise €20.8bn and pay a DPS of €20.3, Porsche SE would need to finance a net €7.5bn.

Analysis

We used the IPO information to go through the valuation according to AlphaValue’s strict procedures. More literature for the IPO syndicate will not change the picture as key figures will not change. The main issues are governance ones. Here we address the valuation fundamentals and governance issues.

Valuation methodology

Our valuation is based on a 12.5x EV/EBIT multiple, mid-way between the market cap weighted average of Volkswagen, Mercedes-Benz, BMW, Stellantis and Renault (average EV/EBIT 2022: 4.1x / 2023: 3.2x / 2024: 2.8x) and Ferrari’s (EV/EBIT 2022: 31x / 2023: 25x / 2024: 23x). We do not include Tesla’s multiple as we see it reflecting a growth path, production set-up and software development too far away from Porsche’s “best-of-each-world” equity story (luxury brand, volume brand, EV brand, quality brand).The €6.75bn EBIT used stands at the mid-point of Porsche AG’s FY22 guidance (sales €38-39bn and RoS 17-18%) leaving room for a FY22 figure in the upper half of the range in FY22 and a risk of a demand slowdown in FY23.

A bull case scenario, rolling the mid-term target (+7-8% sales CAGR and RoS in the range 17-19%) linearly from 2022 would offer an upside risk to our valuation. Conversely, a sharper-than-expected fall in demand in FY23, should recessionary pressures affect entry level car orders, would be a downward catalyst.

Governance weighs

Porsche AG’s governance is a dark spot for minorities with an IPO serving the cash needs of VW Group and the controlling needs of the Porsche/Piëch clan. The pie charts in the above “Facts” section says it all: 

1) the free-float will be limited to a meagre 12.5% (10% excluding the not-so-free-floating 2.5% that Qatar Investment Authority has committed to acquire), 

2) Porsche SE will acquire a 12.5% direct stake, 

3) all voting rights will be shared between VW Group and the HoldCo, the latter raising its say on Porsche AG from 53.3% (100% indirect through VW group) to 65% (25% direct and 40% indirect through the 75% post IPO retained voting rights of VW group).

Despite Porsche AG’s claims, an independence of the to-be-IPOed company is hardly foreseeable as VW group keeps its hands firmly attached to the steering wheel and Porsche CEO, Oliver Blume, has taken over the CEO position of the parent company. On top of this, criticisms over Blume’s (too?) Automotive-oriented profile makes sense given that VW Group’s key issues come from the software development. However, with his prized management skills, knowledge of the VW organisation, support from the Porsche/Piëch family and solid track record at Porsche AG, Blume might help bring the spirit of the Porsche so-called start-up mindset into the parent company.

Impact

Short-term AG, long-term SE

Short term, we would recommend buying into the IPO only below the €75bn mark leaving a 6.5% upside to our €80bn valuation and 13% to the €85bn rumoured top of the range. The probable index tracking buying and scarcity of shares are likely to help push the IPO price to the upper end of the pricing range, in our view. History shows contrasting signs as, Traton – IPOed the VW way (i.e. with 10% free-float) – was priced at the lower end of its €27-33 per share range in 2019, the same outcome applied to the IPO of Aston Martin in 2018, while Ferrari – Porsche’s closest peer – had its IPO at the upper end of its $48-52 pricing range in 2015.

Long term, we stick to our preference for Porsche SE, which, beyond its increased control on Porsche AG could offer a discount narrowing for free based on:

1) a better proxy investment profile in Porsche AG than VW Group,

2) a more liquid investment profile than a direct stake in the scarce pref. shares of Porsche AG,

3) a premiumisation of its cash flows thanks to a more direct exposure to Porsche AG’s.