Porsche : A different way into VW
Porsche is winning the battles, but the war is not over yet: We are upgrade Porscheto Overweight and raise our price target to €78 to reflect changes to our valuation of
VW now that we have incremental visibility on the cost of the emissions crisis. Although
we accept the potential high associate risks and that we remain a long way from a
conclusion to Porsche’s own litigation issues, we think recent legal developments
continue to suggest momentum is in Porsche’s favour. However, were legal cases in
Hanover to arrive at results contrary to those seen thus far in Stuttgart and
Braunschweig, and Porsche were required to pay out on all outstanding claims, we
would see c.19% downside to our PT at €42 (our downside case). Similarly, if Porsche
were to prevail in all the outstanding cases, we would see the shares being worth €88
(our upside case), a 79% premium to today’s share price.
A “cleaner” VW? Upgrading to OW on anticipation of corporate changeWhat has changed? As usual with a huge conglomerate company like VW, particularly
given its wide-sweeping emissions crisis, visibility is less than perfect. "We don't know
what we don't know", was the refrain in reply to what exactly the €16.2bn provision
(announced with Friday's FY15 results) incorporates. Clearly it is not possible to provide
under IFRS for unknown risks but it is evident that VW management have tried to
account for as much of the bad news as possible in one block, including criminal
liabilities. What else is new? This is where our knowledge grows even hazier; but it feels
to us that 2016E guidance and the new management compensation profile were
structured to highlight corporate change, in particular for VW's unwieldy cost structure.
So while the risks aren't past, and we believe the stock will remain uninvestable to
many, we think the balance of risk has moved in VW's favour and we upgrade to OW,
with a new PT of €160 for the Preference shares and €184 for the Ords (a 15%
premium for voting power).