Q3-23: Sluggish BEV transition and a weakening VW performance sink Porsche SE

Consistent with the results of its main shareholding, Volkswagen, Porsche SE posted a meagre set of Q3-23 results marked by a 20% yoy decline in net profit to €3.8bn (vs. €4.8bn). The below-expectation Q3 results from Volkswagen have led Porsche SE to forecast a FY-23 net profit in the lower range of its €4.5-€6.5bn guidance. While the improvement in the group’s liquidity position has boosted net debt expectations, the outlook remains unfavourable for the HoldCo, as the BEV transition is set to

H1-23: hitting a speed bump

After an upbeat H1-22 driven by Volkswagen’s sky-high profitability at a time of steep price inflation in spite of lower volumes, Porsche SE’s H1-23 fell back below the 2021 level. Despite this decline, the HoldCo maintained its outlook of net income of €4.5bn to €6.5bn for 2023. On a positive note: Porsche SE is successfully implementing its refinancing strategy, and the group’s net debt position has fallen from €6.7bn to €5.4bn.

Start of the year boosted by VW's favorable outlook

While Porsche SE reported a sharp decline in net income (-41% yoy) from €2.1bn in Q1 22 to €1.3bn in Q1 23, the outlook looks promising for the HoldCo, which is set to benefit from VW’s upbeat guidance for the FY 2023. Porsche SE reiterated its €4.5-€6.5bn net income target for 2023.

FY22 narrative dominated by Porsche AG’s IPO

While below our estimates, Porsche SE posted a solid net profit of €4.8bn in 2022, €0.2bn above the FY21 level and €2.2bn above FY20. The results were, as usual, driven by the performance of VW accounted for at equity of €4.5bn. The most significant highlight of 2022 was the successful IPO of Porsche AG, which should boost the HoldCo’s future earnings. Given the promising outlook for VW and Porsche AG in 2023, we maintain a positive view on the stock.

Porsche SE, a card to play?

Porsche AG has emerged as the big winner of the IPO at the expense of VW and Porsche SE, with VW no longer being the focus of investors. Porsche SE was removed from the portfolios of investors who had used it as a proxy. While VW is more than ever in the green with a guidance beat for 2023, Porsche SE remains on the side lines: an opportunity to be seized in our opinion.

The outlook remains good despite the Volkswagen miss and a modest Q3

Despite the zero-Covid policy in China, supply chain disruption, sharp increases in energy and raw materials prices and interest rate hikes, Porsche SE appears to be coping well having delivered a 22% yoy increase in net income to €4bn in 9m 22. The below-expectation Q3 results of its main shareholding, Volkswagen, do not seem to have scared the German HoldCo, which maintained its outlook for FY 2022. Some caution is required however as the third quarter was down by 5% notwithstanding the good 9

Why such a negative reaction post the P911 listing?

Porsche AG or SE? It seems that investors have made their choice. Since Porsche AG’s long-awaited IPO on September 29th, Porsche SE has seen more than 15% downside. How can we explain this sudden turnaround? Most likely, investors who bought Volkswagen and Porsche SE to profit from the IPO have switched their positions to more direct exposure to Porsche AG. Considering the meagre free float on AG and the good proxy offered by Porsche SE, the latter looks compelling.

Porsche AG or SE? The IPO toolkit

Porsche’s customers are used to choosing the finish of their 911s. With an IPO of Porsche AG profiling for the coming weeks/months, investors will have the opportunity to choose the finish of their Porsche investment: AG or SE? Buying into the IPO looks too expensive above the €75bn mark, but buying into the HoldCo, Porsche SE, would offer a discount narrowing for free as we expect the HoldCo to become a proxy investment for Porsche AG.

Porsche AG’s shares as scarce as its cars?

The lastest rumours are reassuring about Porsche AG’s IPO, likely to be maintained, and coming any time soon, backed by a strong interest from large (and certainly long-term) investors. Scarcity looks the best adjective to define the future free-floating shares of Porsche AG. This looks supportive for Porsche AG’s value over time and increasing the appeal for proxy investing through Porsche SE.

Mirroring VW's strong performance

Porsche again mirrored VW’s strong performance in H1 22. The holding company benefited from VW’s strong results with revenues up and the operating margin well above expectations, driven by sky high prices despite lower volumes. A good first half-year for the HoldCo which maintains its outlook of a net result of €4.1-6.1bn for FY 2022.

VW's CEO gets off at the next stop

The EV repositioning of the VW group has been one of Herbert Diess’ best achievements, but software issues seem to have got the better of him. From 1 September, Porshe AG’s CEO, Oliver Blume, will replace Mr Diess as the head of the executive board of VW Group. Software problems might have helped this but the timing ahead of a potential IPO of Porsche AG (if any) is by no means ideal. The reality of VW has taken over: the Porsche-Piech family always has the last word.

Porsche AG gets closer to its “independence”

Porsche AG’s CMD looks convincing business-wise but is not likely to calm investors questioning its governance. The long-term 20% EBIT target confirms consensus’ valuation range of €80-90bn, while management sees last years’ improvements on operational efficiency to have raised the margin floor to 15% (vs. 9% reached in 2009). Porsche targets the best in each world with a niche-luxury-style pricing strategy together with premium-like volumes and BEV/ICE parity within two years. The variable rema

A solid Q1 2022, driven by VW’s strong at-equity contribution

Given the increased profitability of VW in Q1 driven by improved sales, strong pricing and cost control, Porsche SE’s figures also turned green with a €2.1bn net result in Q1. Despite the current uncertain market environment, the HoldCo has maintained its FY 2022 outlook.

Solid FY21 net result driven by VW’s at-equity contribution

Porsche SE released solid FY21 net earnings, evidently determined by the strong operating performance of its core investment VW which was led by strong pricing and product mix effects, more than offsetting the negative volume impact from the semiconductor shortage. The announcement of the potential IPO of the OEM Porsche AG is bound to dominate the equity story in FY22. We see this as a clear positive as the HoldCo is likely to a great deal for its 12.5% stake.

Porsche AG’s potential IPO gets a clearer picture

VW Group and Porsche SE have issued more details on the possible IPO of the sports and luxury automaker Porsche AG, including the proposed breakdown of the share capital. The framework agreement sees the Porsche/Piëch family’s holding company taking a direct stake in the automaker while VW should remain the majority shareholder. As we get a better understanding on the planned listing, our view that Porsche SE will get a good deal for its direct stake gains ground.

LIBERUM: Frontier Developments: Warhammer: Soft trading through key period

Frontier Developments (FDEV LN) - Expect change

Initial sales from the launch of Warhammer Age of Sigmar: Realms of Ruin have underperformed. After several disappointing new releases, the company has decided to reverse its strategy to diversify into adjacent game genres. We believe the increased focus should improve Frontier Development’s efficiency but may also increase its revenue concentration and volatility. The update and strategic change lead us to lower FY24 Adj LBITDA to £13.6m from £9.0m. We now also forecast no revenue growth over t

Strong H124 profitability and growth plan ambitions

PROGRESSIVE: IG Design Group: Strong profit growth, key strategy initiatives and quantified aspirations

IG Design Group delivered a 27% increase in adjusted PBT to $34.8m for H1 FY24 (to 30 September) with a significant reduction in net debt to $15.1m, as signposted in last month’s trading update. The adjusted operating profit margin was some 270bps higher at 8.6% (vs 5.9% in H1 FY23), the highest achieved since H1 FY20 ahead of the CSS acquisition. Management has provided more details on the key attributes and initiatives for its new growth-focused strategy. The group is on track to return to pre

Hardman & Co Research: Surface Transforms (SCE) - Funding for growth: Open Offer

In the past two years, Surface Transforms (SCE) has quadrupled its order book, raised monthly sales run rates from £0.2m to £1.0m and expanded its capacity four-fold to a £20m pa sales rate. A 3 November update pointed to production teething troubles. October sales of £1.0m were below prior estimates, so we significantly reduced our 2023 and 2024 estimates. We estimate PAT breakeven for 2H24. Initially from debt, SCE has the resources to finance capital expenditure from internal cash flow to rai

The Joy of Techs - Cavendish Technology quarterly sector note

£23.3bn in enterprise value has been returned to AIM technology shareholders over the past six years in the form of 51 public to private takeouts, including 10 in 2023 alone with the takeovers of Smoove* and Tribal announced in early October. With UK valuations appearing cheap and looking more attractive to potential acquirers, we take a moment to reflect on the trends of corporate and private equity bidders targeting AIM-listed technology companies going back to 2017, through the uncertainties

Accrol Group Holdings (ACRL LN) - Consecutive upgrades

H1 FY24 has delivered positive trading momentum with continued volume growth and an acceleration in margin recovery back to pre-pandemic levels.

Frontier Developments (FDEV LN) - Road to recovery

We are encouraged by Frontier Developments' announcement of an Organisational Review. We believe many video games companies inflated their expense bases during 2020 and 2021 and reduced focus on return on investment. Frontier now plans to reduce annual operating costs by up to 20% by the beginning of FY25. Frontier's Organisational Review returns the business' focus to optimising returns, leading us to forecast a recovery in adjusted EBIT margins to 5.3% in FY25 and 9.4% in FY26. We believe the

PROGRESSIVE: IG Design Group: H1 trading sees significant net debt reduction and profit growth despite lower sales

IG Design Group has delivered substantial growth for the H1 trading period (to 30 September) in terms of key profit measures and margins, together with strong cash flow and net debt reduction, both of which exceeded management expectations. These achievements have been attained despite lower sales compared to H1 FY23, with the adjusted operating profit margin in H1 FY24E therefore set to surpass last year’s 5.9%. As such, the overall results clearly show the ongoing benefits of the group’s strat

LIBERUM: New Energy Nuggets: Hydrogen - the future is green

SHORE CAPITAL - Portmeirion (PMP) - House Stock at 353p - Significantly undervalued

Initial Equity Trading Comments - 11 May 2023

Morning Note – 14 November 2023

LIBERUM: Ceres Power - Initiation - A Compellingly solid case

The Hardman & Co Monthly: October 2023

Feature article: Liquidity – shrinking when it’s most needed A review of liquidity in London since 2016 Summary ► Liquidity is the lifeblood of equity markets. ► Following the events at the Woodford Equity Income Fund (WEIF) in 2019, professional investors, increasingly, focus on liquidity when making investment decisions. ► However, this paper shows that liquidity declined significantly between 2016 and 2022. Our work demonstrates that, in 2016, the total value traded of trading companies lis