Global Insight Perspective | |
Significance | Porsche Automobil Holding SE has announced that it increased its net profit by 51% year-on-year to 6.392 billion euro in fiscal year 2007/08 as a result of the positive effects of its cash-settled share option in Volkswagen. |
Implications | Some observers have accused Porsche of being primarily a hedge fund more than a carmaker as a result of the profits it generates from its market activities in comparison to its car-making business. Porsche's operating profit, corrected to take into account hedging activities, would appear to confirm this, coming in at 1 billion euro. |
Outlook | Although Porsche has benefited hugely from the complex financial instruments and hedging strategy it has used to acquire the Volkswagen stake, the company's core car-making business faces a challenging operating environment in the final month of 2008 and into 2009 as a result of the ongoing global economic slowdown. |
Porsche Generates 80% of Profit from VW Stake
Porsche Automobil Holding SE has issued a press statement stating that the group increased its fiscal year (FY) 2007/08 net profit by 51% year-on-year (y/y) to 6.392 billion euro (US$8.208 billion) in comparison to 4.242 billion euro in FY 2006/07. Porsche's reporting period runs from August to July. Porsche attributed the jump in profit to what it described as "special influences" as a result of its shareholding in the Volkswagen (VW) Group. Porsche also stated that its profit before taxes for FY 2007/08 increased 46% to 8.569 billion euro, in comparison to 5.857 billion euro in the previous year. However, as a result of the gains made from Porsche's rising stake in VW, the company actually posted a turnover figure of 7.466 billion euro, lower than the company's profits before taxes during the period, and only 1.3% higher than last year's figure of 7.368 billion euro. As would be expected, the percentage increase for the company's sales stood at the similar amount of 1.2% y/y as Porsche sold 98,652 units in comparison to 97,515 units.
The main factor behind these quite remarkable financial results was Porsche's holding in Europe's largest carmaker, the VW Group. Porsche recently announced that it had acquired a 74.1% stake in VW through a combination of a 42.6% stake owned in shares and a 31.5% share held in cash-settled options. It is the latter element that has allowed Porsche to take such a large holding in VW, almost by stealth as it does not have to inform the German stock market about its acquisition of these options. And it is this element of Porsche's shareholding in VW that recently caused the so-called "short squeeze" on VW shares, which saw their value rocket at one point to 1,005 euro, as hedge funds that had gambled on the stock falling in value rushed to buy up a much-diminished pool of shares to cover their short positions. However, it should also be added that this extraordinary spike in VW's share price did not occur during the reporting period in question and as a result would have had no bearing on Porsche's latest results.
Porsche's FY 2007/08 Financial Results | |||
bil. euro | 2007/08 | 2006/07 | % Change |
Profit Before Tax | 8.569 | 5.857 | 46.0 |
Profit After Tax | 6.392 | 4.242 | 51.0 |
Turnover | 7.466 | 7.368 | 1.3 |
Sales (units) | 98,652 | 97,515 | 1.2 |
In a statement, Porsche said that its hugely impressive net profit and profit before taxes were the result of the positive effects of the cash-settled share options, from which Porsche earned income when VW's share price rose. As a result of the rise in share value that occurred during the reporting period, the contribution to profit from these transactions amounted to 6.834 billion euro, in comparison to 3.593 billion euro the company earned from the mechanism in FY 2006/07. Porsche has announced that it will increase dividends as a result of its huge rise in profits. It will propose at its annual shareholders' meeting in Stuttgart on 30 January 2009 to pay a dividend of 0.694 euro per ordinary share and 0.70 euro per preference share. It will also increase the special dividend to 2 euro on the ordinary shares, up from 1.50 euro last year. As a result, total dividend payments will increase by 23% to 472 million euro. However, Porsche also detailed its operating profits generated from its car-making business, with an appropriate adjustment being made for the special effects from its hedging operations and interest. Porsche stated that this figure came to a healthy 1 billion euro, despite increased development costs during the period as a result of the new Panamera four-door model, the hybrid version of the Cayenne sport utility vehicle (SUV), and the new low-emission and reduced consumption engines that have been added to the revised 911 model range.
Outlook and Implications
By any measure, Porsche's most recent financial results are extraordinary and illustrate the enormous impact on the company's bottom line that its holding in VW is having. So far Porsche's shrewd chief financial officer (CFO), Holger Harter, has planned out his strategy to perfection. Over the years he has developed sophisticated currency hedging strategies that have allowed the company to ride out currency fluctuations in key markets such as the United States and Japan, while Porsche's effective takeover of VW has generated enormous sums in share dividends and rising share values, from which it has benefited as a result of cash-settled options. The fact that 80% of the company's profit before tax in FY 2007/08 was earned through its VW stake shows the how important financial engineering is to Porsche's bottom line. It appears that the strategy that Harter and Porsche Chief Executive Officer Wendelin Wiedeking have enacted to take over VW has been executed expertly and that Porsche has outfoxed the hedge fund managers at their own game. As a result, the accusation by some in the financial community that Porsche's primary commercial activity is as a hedge fund rather than a carmaker does have some weight.
In terms of Porsche the carmaker, the outlook is not so bright. The company has posted some rather catastrophic sales figures in its biggest market, the United States, in recent months, with sales having halved in October; sales of the Boxster and Cayman fell from 706 to 153 units. Porsche is facing a number of difficult market factors, irrespective of the current extremely harsh trading climate in its primary markets, the United States and Western Europe. Porsche has reached a point where its models are in the second half of their model cycles. The 911 has been revised this year, but despite major advances to the model's powertrains and the introduction of the Porcshe Doppel-kupplungsgetriebe (PDK) double-clutch gearbox, there have been few styling revisions to the 997 version of the 911. The Cayenne is still selling reasonably well but is subject to the changing fashions of the luxury SUV market and high fuel prices, with the lack of a diesel version becoming an increasing Achilles' heel for the company. Porsche should gain some sales impetus from the launch of the new Panamera in 2009, but there is little doubt that Porsche's core business faces highly challenging conditions going into 2009.