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Daniel Loeb Comments on SoftBank Corp
Posted by: Holly LaFon (IP Logged)
Date: May 2, 2014 10:56AM
SoftBank Corp. (TSE:9984)("SoftBank") Update Following its strong rally at year‐end, SoftBank shares pulled back 15% during Q1 2014. We believe this pullback was due to technical trading and that SoftBank's fundamentals are stronger than when we initiated the position during the fourth quarter of 2013. SoftBank has continued to demonstrate significant value growth in key drivers across each of its underlying businesses. The Japanese wireless segment successfully navigated the temporary impact of NTT's iPhone offering and seasonal promotional activity in March 2014, while consensus valuations for Alibaba Group have grown from $120 billion to $171 billion year‐to‐date. These trends play into the four‐pronged equity value expansion story for SoftBank shares:
1) SoftBank Mobile value expansion of ¥230 per share annually (EBITDA growth, constant multiple)
2) SoftBank deleveraging of ¥400 per share annually (Capex cliff in 2013)
3) Alibaba value expansion of ¥500 per share ($20 billion per annum Alibaba appreciation)
4) Narrowing of the NAV gap (currently 23% versus consensus)
From a cash and deleveraging perspective, the recently announced sale of the eAccess business to Yahoo! Japan will further bolster these at SoftBank Mobile, as it offloads nearly $1 billion in annual Capex and transfers $4 billion of net cash from Yahoo! Japan to SoftBank. We believe the Yahoo! Japan transaction will unlock ~¥400 per share value for SoftBank, offset by a ~¥120 de‐rating of SoftBank's Yahoo! Japan equity stake, for a net ¥280 benefit to NAV.
Most significantly, SoftBank's market cap has grown by only $9 billion since July 2013 while consensus valuations of Alibaba by U.S. sell‐side analysts have nearly doubled from $86 billion to $171 billion today, implying a $31 billion increase in the value of SoftBank's 37% stake. Likewise, SoftBank's stake in Sprint has also appreciated by $4 billion. The growth in the underlying asset values, enhanced by the accretive nature of the Yahoo! Japan transaction have only served to increase the relative attractiveness of SoftBank shares since October, despite the market's hesitation.
SoftBank is witnessing substantial growth in underlying asset value, de‐levering via the Yahoo! Japan transaction, and poised to drive further de‐levering and free cash flow growth in SoftBank Mobile. It currently trades at a 23% NAV discount to consensus estimates of value. Alternatively, valuing SoftBank Mobile on a P/FCF methodology suggests SoftBank is trading at a 45% NAV discount. The discrepancy lies in the fact that the EV/EBITDA approach understates SoftBank Mobile's high free cash flow conversion and low cost of capital. These discounts are clearly unwarranted. We anticipate SoftBank's NAV will post continued growth and shrink this discount as management's strategy comes into further focus and transparency around underlying assets (particularly Alibaba) improves.
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