Porsche braves grim market but luxury valuation may prove elusive
Like every business that goes public, Porsche has had to set out the risks it believes investors should know about.
One of the world’s highest-profile carmakers did so last week in an 820-page prospectus packed with the sort of historical detail and data on its best-selling models that delight aficionados.
But the list of risks was also a sobering reminder of the gamble the German carmaker is taking as it lists during a bear market unleashed by rising interest rates, sky-high energy prices and Russia’s invasion of Ukraine.
Europe’s energy crisis could drive its costs higher, Porsche warned, as it pointed out that the global chip shortage has not gone away. The threat of coronavirus lockdowns also hangs over China, the group’s largest market.
Porsche’s owner, Volkswagen, is braving this grim backdrop because it needs to fund its own costly adaptation to the era of electric vehicles. VW has already committed €52bn to its electric future and will spend more to manufacture battery cells.
Selling a stake in Porsche, its most profitable brand, should help. The carmaker will raise €9.4bn and be valued at more than €75bn if it sells shares at the upper end of its target range. Both metrics would comfortably make the IPO one of Europe’s biggest on record.
The company is expected to sell shares at €82.5 a piece, the top of the range, according to terms seen by the Financial Times, with trading due to start on Thursday. “If there is one company that can list in the current environment, it is Porsche,” said a banker familiar with the matter.
While executing an IPO during one of the toughest economic backdrops in years will be an achievement, the luxury valuation coveted by Porsche may prove elusive.
Shares in Ferrari, the high-end marque that went public in 2015, trade at 30 times its projected earnings, while the trio of luxury fashion houses LVMH, Hermes and Christian Dior all trade between 20 to 40 times, according to S&P Global Market Intelligence.
By contrast, if Porsche sells shares in the middle of its range, investors will be paying roughly 15 times the carmaker’s projected earnings, according to FT calculations using analysts’ estimates for the company’s net profits next year.
The discount to Ferrari partly reflects one unavoidable fact: there are simply too many Porsches, stripping the carmaker of the scarcity premium central to the definition of luxury.
One sales pitch being made to investors is that Porsche offers “luxury with scale”, something a banker familiar with the IPO acknowledges is an oxymoron.
Porsche sells roughly 300,000 vehicles a year while Ferrari’s total is just 10,000. It is a gap that analysts say also leaves Porsche more vulnerable to economic downturns as its customers are more likely to curb spending.
“In terms of premium-ness, we consider Porsche offering is closer to the upper end of the Mercedes portfolio than to Ferrari’s,” note HSBC analysts.
But it is not the only reason for the discount. Investors will have to stomach owning shares without any voting rights as well as the fact that Porsche’s chief executive Oliver Blume was recently appointed head of Volkswagen.
It is a structure that “deserves” a deep discount, the HSBC analysts say. “The question for most investors is whether Porsche will be at liberty to plot its own course given the interconnected nature of its shareholder structure with that of VW, and the fact that they share the same CEO.”
Among the risks Porsche highlighted in the prospectus is its reliance on VW’s efforts to develop its own software — a project that has been beset by delays.
Porsche has already had to push back the launch of the electric version of its Macan SUV because of software delays, but warned that breaking from VW would force it to pay compensation and leave it starting from scratch.
As investors decide whether to buy, Porsche can at least convincingly trumpet scarcity by one measure: the IPO is one of a small number in Europe this year and the only one approaching this size.
Bankers also point to the fact that Ferrari’s stock has risen more than 200 per cent since the group’s IPO. What is more, a valuation of 15 times earnings for Porsche would dwarf the lowly five times that Volkswagen’s major German rivals Mercedes-Benz and BMW trade at.
Porsche is a “glorious asset”, says Philippe Houchois, an analyst at Jefferies. Investors will soon have the chance to give their own verdict.