SoftBank Group Corp. reported its earnings results for Q1 FY2020 ending June 30, on Tuesday (Aug 11, 2020). Time to update my SOTP valuation …
Since I was on vacation, this SOTP update might be a bit late. Currently, SoftBank Group and its founder Masayoshi Son are in the spotlight once more: There are rumors that SBG is buying so many call options on big tech names, that it pushed the whole markets to new highs… (more below)
Key Info Q1 ’20
SBG will stop reporting their own calculation of shareholder value per share (here) on a daily basis. Instead, they will update it on a quarterly basis, because private companies are revalued every three months only. Anyway, I advised against using or trusting SBG’s own calculation blindly.
A new investment management subsidiary is established, owned by SBG (66%) and Son (33%). I am no a fan of that! (slide 68 of SBGs presentation). Its purpose was ‘managing excess cash and diversification of assets’ with a capital investment of $ 555m, and owned by SBG (67%) and Masayoshi Son (33%). Then …
Update Sept 7: News broke that SoftBank Group bought massive call options on tech companies, driving the recent rally. SBG is now dubbed the ‘Nasdaq Whale‘. IMO, this sounds really worse and clearly overshoots the stated purpose above! This is clearly out of their core competencies.
SBG achieved its asset monetization aim of JPY 4.5 trn ($ ~42 bn), announced earlier in March.
- I like that progress regarding communicated aims. It is a perfect way to narrow a NAV discount deemed too-high.
SBG gives up on reporting operating income, finally admitting that it is an investment company and does not operate any businesses.
- I think that is a reasonable decision and resembles reality.
A reported shareholder value of $ 230 bn compares to a current market capitalization of USD 125 bn as of Aug 11, 2020 (slide 71). Unexecuted share repurchases of JPY 1.5 trn ($ 14 bn) are left, which could be done after April 2021.
- This still indicates a high discount to NAV and a significant undervaluation. But I will take a closer look below …
SOTP valuation update
SBGs asset structure is getting more complicated, compared to former company presentations. This is, because SoftBank Group’s ‘gross’ asset holdings have to be adjusted for many derivative transactions enterer into with third parties. These are call options with Deutsche Telekom AG for the remaining shares of T-Mobile US (TMUS) and certain forward sales of Alibaba (BABA) shares. Accordingly, performing an SOTP valuation is more difficult and it is more likely to do analytical errors.
Alibaba remains SBG’s main asset. Toghether with the TMUS this forms the so called ‘non-strategic listed shares’. Alibaba (BABA) shows a positive performance since Aug 11, and TMUS shows a flat performance. Selling off Alibaba shares potentially triggers capital gains tax payments. Thus, SBG’s Alibaba stake market value should be discounted.
T-Mobile US shares were mostly sold off, according to SBG’s consolidated financial report, pages 4ff. The remaining 101m TMUS shares do not provide much upside for SBG, since Deutsche Telekom AG (DTE) has the right (call options) to buy 45m shares at a strike price of $103 (below current price of $ 115) and the remaining 55m shares for a 20-day average price after executing the first option.
Softbank Corp., SBGs Japanese telco subsidiary, showed a negative share price performance (-11%) since Aug. 11. A secondary offering of 927m shares of Softbank Corp (see here), should lead to proceeds of about 1,238 bn JPY ($ 11.75 bn) at a price per share of JPY 1,205 only. Compared to 1,450 at Aug. 11 and 1,300 as of Sept. 16.
SBG fully divests its Arm subsidiary, currently held directly and at the vision fund (see here) to Nvidia in a transaction worth up to $ 40 bn, comprising of $ 10 bn in cash and $ 21.5 bn in Nvidia stock and others. This deal did not deliver the hoped for long-term results. The strategic decision might not be in the best interest of ordinary shareholders.
SVF had some positive news lately with various planned and executed IPOs. Still, the downside from SVF (and upside) remains huge.
Other assets are negligible.
Net Debt of $ 55 bn has to be deducted from total gross asset value.
A rough net asset value calculation shows undervaluation. Assuming recent asset parformance cancels each other out (which should be about right), I would start with the reported $ 231 bn shareholder value from above. Accounting for potential tax issues, I apply a discount of 20%, resulting in an adjusted number of $ 185 bn. SBG currently has market value of $ 133 bn.
This discount of 28% indicates a potential of 40%.
Share buy backs paused during August and so did the share price performance. SBBs paused as reported Tuesday, Sept 15 (see here), due to fear of regulatory issues (probably in connection with Arm sale to Nvidia and other transactions). When they resume they should provide further technical support for the share price going forward.
- SBG’s stock hit its high of JPY 6,932 on Aug. 3. This was the last day the company purchased its own shares.
SoftBank could be taken private by Masayoshi Son and third party investors. Rumors resurfaced recently. Most likely a far fetched scenario, but it provides more optionality and potentially more upside.
Considering the above, I still feel the risk/reward situation is very favorable. Less than stellar governance and the real possibility that SBG capital will be invested in questionalbe pursuits was always real. I made that clear in my very first SoftBank Group post (read here) by asking
Does Masa just over pay by a factor of X because he just has so much money to spend?Softbank Group SOTP Valuation
In conclusion, I will hold on to my small position in SoftBank shares.
I hope you enjoyed my SoftBank post. Do you agree with my main assumptions and methods? What is your current opinion on SoftBank?