Important legal victory, compelling value
● The plaintiffs’ appeal (claims of €1.18bn) against Porsche’s victory on 17
March 2014 was on Thursday rejected by the Higher Regional Court of
Stuttgart. It upheld the original ruling in Porsche’s favour and did not
allow the plaintiffs to appeal the case to the BGH (the German Federal
Court of Justice, effectively Germany’s Supreme Court). We expected the
appeal decision to go in Porsche’s favour (given the court’s comments on
26 February) but, importantly, we believe some investors may now make a
step-change and choose to remove the €1.18bn from the headline
outstanding claims of c€5.4bn. The €1.18bn represents c4.4% of Porsche’s
market capitalisation. The plaintiffs can complain that they are not allowed
to appeal but to do this they would have to go the highest court in Germany
(the BGH). It seems unlikely to us that this court would consider their case.
● On the 20 March 2015 we raised our Porsche one-year target from €100
to €125. We believe that a price of €150, 69% above the current price, is
feasible within two to three years. Our price target increase reflected a
2016 EPS rise of c3% at Porsche and Volkswagen (VW), and the rise in our
VW prefs target from €230 to €300 in our Structural winner plus FX: target
up to EUR300 note (9 March 2014). We believe VW is significantly
underrated (2016E/17E P/E of c7.6x/c6.8x and FCF yield of c10%) and
offers the most attractive risk-reward profile of the German and French
auto OEMs. We believe investors are overly focused on conservative 2015
EBIT guidance (hit by weakness in Brazil and Russia), whereas Chinese JV
earnings (below EBIT) are boosted by FX translation. As FX hedging rolls
off, the strong USD, RMB and GBP theoretically boost EBIT (especially
Porsche and Audi) by c35% from 2016.
● As of 26 March close, the total SOTP/legal discount is c27%, or c€10.1bn.
On top of an assumed 15% SOTP discount, the market implies a c€4.5bn
legal discount – c140% payout on €3.2bn of “live loss claims”. We exclude
“unrealised” gains of nearly €1bn and the €1.18bn appeal Porsche has won.
● Porsche has won all finalised legal cases. The rest are in Germany, where
precedent does not apply and awards tend to be lower. The six-year US
statute of limitations since the October 2008 short squeeze has ended.
● The next legal date is likely to be witness hearings on 7/8 May 2015 at
Hanover (€1.8bn Elliot case) and the criminal case is expected to be heard
this June/July. The Hanover court has approved c21 witnesses, but we only
expect six or seven to testify because Porsche’s former CEO and CFO have
been charged in a criminal case and the Supervisory Board is being
investigated – this means these witnesses can choose not to testify. On 14
October 2014, the Hanover Court Judge said that the plaintiffs’ claim of a
“cartel” between Porsche and its banks was a weak case and that it should
be resolved quickly.
● Our one-year €125 target is largely based on SOTP (VW ords at €300
implying a VW 2016E/17E P/E of 9.7x/8.7x) and assumes a Porsche
2016/17E P/E of 8.1x/7.4x. We assume a combined SOTP/legal discount of
c17%, or €8.6bn – a 15% SOTP discount (€7.1bn) and a further c4% from a
€1.5bn legal discount (unchanged). We raise our SOTP discount from 12.5%
to 15% due to lower dividends and the slow progress of investments. We
note investors’ reluctance to use a lower discount, but this could change.
● Porsche may be on many more investor watch lists within 6-12 months and
if VW shares reach what we view as a feasible price of €350 (10.1x 2017E
P/E) we think Porsche shares could rise c69% to €150 within three years.