Porsche IPO: can it close the gap to its Italian rival Ferrari?
Head of Equity Strategy
Summary: Volkswagen has just announced that its IPO of Porsche AG is fully subscribed by multiple times securing the public listing of Porsche which is set to be priced on 28 September with first day of trading on 29 September under the ticker symbol P911. Porsche is being valued around EUR 75bn in a public offering that will make it the fifth largest IPO in Europe's history. Porsche is strong car company with revenue up 8% in the first-half of 2022 and sporting an EBITDA margin of 24.5% This is high for the industry but still trailing its Italian rival Ferrari and here also lies the potential for future shareholders of Porsche, namely closing the valuation and operational gap to Ferrari.
The maze of Porsche and Volkswagen
In recent years luxury carmakers such as Ferrari and Aston Martin have been publicly listed with very different outcomes. Ferrari has been a spectacular success while Aston Martin is tethering on a bankruptcy which has happened many times before in history for this proud UK car brand. Volkswagen has recently announced that it plans to IPO the Porsche carmaker and brand and the IPO pricing is set for the 28 September with the first day of trading on 29 September.
What is interesting about the IPO is the maze-like ownership structure with Volkswagen owning the Porsche brand and car manufacturing, but itself being owned by the Austrian Porsche-Piech family. The story of why we have ended up in this weird ownership structure started with the privatization of Volkswagen in 1960 in which laws were enacted that stated that any shareholder with more than 20% ownership would have veto over any resolution. The German government kept 20.1% and thus control over Volkswagen. In 2005, Porsche SE (the holding company of the Porsche family) began accumulating a stake in Volkswagen and by 2006 it controlled 25.1%. In October 2008, Porsche SE announced that it had acquired 42.6% with options for another 31.5% as it wanted to go to 75% in order to consolidate Volkswagen’s cash position on its balance sheet. With the Government still owning 20.1% short sellers scrambled to cover their shorts and Volkswagen’s stock price briefly went above €1,000 making it the most valuable company in the world. In the end Porsche SE ended up controlling 53.3% as of the latest shareholder figures. In 2011, Porsche and Volkswagen merged and Porsche AG was designated as a subsidiary of Volkswagen AG. See plot below for voting rights distribution of Volkswagen.
The IPO details
Under the IPO Prospectus it says that Porsche AG will split its share capital in two 455.5mn shares each in ordinary and preferred shares (a play on its iconic 911 car model) with the former share class providing voting rights. The share class that will be floated on the Frankfurt exchange with the ticker symbol P911 is the preferred which has no voting rights but entitled to a dividend of €0.01 per share more than the ordinary shares. The
Volkswagen plans to sell 25% plus one share in Porsche AG to Porsche SE giving the holding family and the Porsche family blocking minority right. In addition, Volkswagen plans to sell 25% of preferred shares on the market with news today that the offering is already multiple times oversubscribed across the whole price range from €76.50 to €82.50 with Qatar Investment Authority, Norway’s Sovereign Wealth Fund, and T. Rowe Price have already committed themselves in the IPO. The indicated price range puts Porsche AG valuation at €75bn which is close to Volkswagen’s market value of €91.6bn. The public offering size of Porsche AG shares will potentially make it the fifth largest IPO in Europe’s history.
Volkswagen is selling shares in Porsche AG to the public to accomplish two objectives. Reduce the valuation discount on Volkswagen shares from the cross-holdings and unlock more value from a pure luxury brand play (Porsche). In addition, the public offering raises capital for Volkswagen very capital intensive switch to being all electric vehicle over the next decade. Volkswagen is expected raise around €19.5bn from the public offering in which is promising to pay out around €9.6bn in a special dividend by early 2023.
Porsche is a well-run company generating €33.1bn in revenue in 2011 with an operating profit of €5.3bn and EBITDA of €7.4bn translating into an EBITDA margin of 24.5% which is good but not on par with Ferrari’s 35.7% in 2021. It should be said that Ferrari is company that can extract even more in profits per car manufactured due to its higher brand status. With an estimated market value of €75bn and the EBITDA of €7.4bn in 2021 it translate into a multiple of 10.1x which is significantly lower than Ferrari’s multiple of 22.2 times market value to EBITDA suggesting Volkswagen and the Porsche family wants a successful IPO and are aware of the current market volatility. Porsche’s revenue grew 8% in the first-half of 2022 with strong cash flow generation of €3.9bn which is a strong result given the general weakness in the car industry, but still lower than Ferrari which has seen its revenue growing 17.3% y/y and 24.9% y/y in Q1 and Q2 respectively.
The main question for potential shareholders in Porsche is whether the company can make a successful transition to become fully EV while preserving or even expanding margins. It is clear when you compare Porsche to Ferrari that there is room for improvement and a potential upside if Porsche can improve its operations and expand on its already strong brand. Volkswagen has promised that synergies will continue to exist between the Volkswagen group and Porsche, but for the future success of Porsche we believe the key is more autonomy.
One the absolute key risks to the Porsche stock is the growing cost-of-living crisis as soaring energy costs are reducing disposable incomes in Europe. The sector that is the most at risk from lower demand during this challenging period is the consumer discretionary sector in which the car industry sits. While Porsche is in the high-end of the car industry selling to the 1% of the income and wealth distribution this part of society could also significantly reduce its consumption during the ongoing energy crisis and inflationary period. Because Porsche buyers are wealthy individuals it is not unreasonable to speculate that falling equity and bond markets could severely impact sentiment among the 1% richest of the world. Another risk for Porsche is if the EUR stages a strong comeback as it would the value of international sales and reduce its competitiveness abroad. The war in Ukraine or new Covid outbreaks can impact supply chains and demand for Porsche cars.
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