● We initiate coverage of the holding company Porsche SE with a
Buy and price target of €100, potential upside of 38%: Over 90%
of Porsche’s value is in VW (a 32% equity holding and 51% of votes)
and we believe VW ords/prefs are very cheap (2015E P/E c6.1x).
While we do not pretend to be lawyers, the current SOTP/legal
discount of 25%, c€7.4bn appears excessive. One case against the
company appears to include nearly €1bn of claims relating to
“unrealised gains”. Porsche’s dividend yield of c4.5% and 5.5% in
2015E and 2016E respectively seems very attractive.
● Legal issues to linger but Porsche has won two cases in
Germany with the same judge to rule on five more cases
totalling €2.1bn of damage claims: Net damage claims are c€5.6bn.
The US case is only about jurisdiction and only eight plaintiffs are left
with total claims of $250m. Porsche has won two cases at the Regional
Court of Braunschweig and as the same judge is hearing five very
similar cases in late April/early May, a different ruling would seem
surprising to us.
● Statute of limitations over in Germany and even losing one case
there would not create a legal precedent: The German statute of
limitations since October 2008’s short squeeze – the cases against
Porsche largely relate to allegations of market manipulation and
inaccurate information at this time – is now in force so new cases
there are unlikely. Even if Porsche were to lose one, this would not
create a legally binding precedent under German law. Porsche will not
accept any settlements and would likely appeal any case it lost.
● Recent pullback in VW shares has hit Porsche, creating a good
entry point ahead of possible positive catalysts: Porsche shares are
down 8% from their all-time high of €79.1 (21 January). We see three
likely positives in the next 12 months: (1) a c28% rise in the VW ord
share price; (2) reduction in the SOTP/legal discount due to greater
investor understanding and potentially good news on the lawsuit front
(the first oral hearing for a €1.36bn case in Germany will be held on
10 February); and (3) greater confidence in the level of Porsche’s
dividends and use of €2.6bn net cash.
● Our price target of €100 is based on SOTP, dividend yield and
P/E: We assume a 10% SOTP/holding discount and a legal discount
of €2.8bn (50% of the €5.6bn claims versus the c79% currently
implied), implying a total SOTP/legal discount of c17.5% – down
from the current 25%. We do not expect cases to be lost and so this
may prove too cautious.
● We think the Porsche share could reach c€132 within three years,
possible upside of c82% compared to c60% for VW prefs: This
assumes VW ords at €288, still only 8.8x 2016E P/E (assuming a 4%
VW ords discount to VW prefs at €300). Porsche offers c10ppt more
potential upside than VW in our central case in one year and c22ppt
on a possible three-year view but also slightly more downside.