SoftBank (OTCPK:SFTBY) is a highly successful Japanese company that is traded on the Nikkei stock exchange. The company offers an American Depositary Receipt (ADR) available for trading on the U.S. markets. An ADR is a negotiable security that represents securities of a non-U.S. company that trades in the U.S. financial markets. These are denominated and for all intents and purposes can be treated like any other stock traded in the U.S. The price of an ADR generally tracks the price of the foreign security in its home market, barring occasional news released during U.S. trading hours.
SoftBank is one of the largest shareholders of Alibaba, the world's leading online marketplace company that has taken advantage of China's booming economy. Recently, Alibaba has indicated that it is about to file its F-1 papers to start the IPO process in the U.S. stock market. This IPO is projected to raise a record $20 billion for the company and increase the stock prices of the two largest shareholders: SoftBank, which owns 36.7% of Alibaba, and Yahoo, (NASDAQ:YHOO) which owns 24%.
SoftBank's Major Investments and Core Business Other Than Alibaba Can Be Valued Around $68 Billion
Unlike Yahoo's struggling core business, SoftBank has a thriving, profitable core and owns additional equity interest in Sprint (NYSE:S), Yahoo Japan (OTCPK:YAHOY), and RenRen (NYSE:RENN). Sprint released its latest earnings report on April 29, 2014, showing a lower-than-expected loss in profits and increased revenues; this propelled the stock 11% higher to close at $8.27, which values the company at around $33 billion. SoftBank currently owns 80% of Sprint. In addition, SoftBank's CEO Masayoshi Son has indicated that he would like to merge Sprint and T-Mobile (NASDAQ:TMUS) in order to compete with the current U.S. telecom duopoly of AT&T (NYSE:T) and Verizon (NYSE:VZ).
At the moment, there are some obstacles that may prevent this merger from occurring as there may be a potential harm to consumers with less choice in mobile carriers. However, Son is determined to push forward and is planning on issuing a bid using corporate bonds, convertible bonds, and loans in order to do so. A formal bid is expected at some point this summer either in June or July. Of course, there are hurdles with the Federal Communications Commission (FCC), but SoftBank is one of the few companies with the means and influence in order to move this potential merger along.
As promising as SoftBank's other developments are, I am confident that the windfall received from the mammoth Alibaba IPO will eclipse other developments in the core business and other equity interests. To understand what the share price will be on the day of the IPO, I have developed a sum of the parts analysis in order to determine the current value of Alibaba already priced into the stock. From this, a projected share price can be determined based on the expected opening day trading price of Alibaba. Since this is a Japanese company, it is mindful to note currency fluctuations between USD/JPY may impact the price of the SoftBank ADR.
Share price information obtained from the SoftBank website is presented below. The table breaks down all major investments, not including Alibaba or the core business.
Source: SoftBank corporate website.
As seen in the table, the major investments other than Alibaba or the core business are slightly over $40 billion. Based on a CNBC Fast Money appearance by Whale Rock Capital fund manager Alex Sacardote on Nov. 22, 2013, the estimate for SoftBank is $80 billion, including all businesses except the stake in Alibaba. Based on the information from the table above, the core business of SoftBank is valued at around $40 billion. The information from this CNBC video is based on Q3 2013 earnings, which were less robust than the Q4 2013 earnings. Therefore, it seems to reason that this estimate is on the more conservative side.
My Sum-of-the-Parts Analysis Shows Alibaba's Undervalued Price Into SoftBank Stock Value
Since SoftBank is a holding company, a 15% discount (from Goldman Sachs analyst Ikuo Matsuhashi) can be applied to the stock price, resulting in an overall market cap of $68 billion -- not including the Alibaba stake. As of April 30, 2014, the current market cap of SoftBank is $88.5 billion. This means that $20.5 billion ($88.5 billion to $68 billion) is the value of Alibaba priced into the stock. As SoftBank owns 36.7% of Alibaba, this calculates to a projected Alibaba valuation of $56 billion priced into the SoftBank stock, which is much smaller than the current analyst estimates (between $155 and $250 billion).
Incremental Valuation Analysis Projects SoftBank Pre-Alibaba IPO Price at $55/Share, Post-Alibaba IPO Price at $71/Share
From Goldman Sachs analyst Ikuo Matsuhashi the sum-of-the-parts model used determined that for every 10 trillion yen increase in Alibaba's valuation, there is a 180 yen increase in the share price of SoftBank. Again, this was done in December 2013, before the monstrous 66% revenue growth by Alibaba, reported by Yahoo in April 2014. Nevertheless, the old model will be used as it is more conservative.
I converted this from JPY into USD, and found that for every $9.8 billion added to Alibaba's valuation, $1.76 should be added to the share price of SoftBank. In the secondary market, it is believed that Alibaba is fairly valued around $155 billion, and is believed to be $245 billion on the opening trading day of the Alibaba IPO. Using this analysis, the additional value to SoftBank before the IPO is $99 billion and is $189 billion on the opening trading day.
The result is $17.82 added to the current share price before the IPO, and $34.02 added to the current share price on the opening trading day of the IPO. At the time of this article, the share price of was $37.10. From my complete SOTP analysis, the price before the Alibaba IPO should be around $54.92, and on the opening trading day it should be $71.12, resulting in an almost 100% increase from the current price. As I mentioned earlier, this assumes an exchange rate of $1/102.123 JPY as of April 30, 2014. Any fluctuations in this exchange rate will affect the share price of the SoftBank ADR accordingly.
SoftBank's Annual Operating Income Targeted to Report Around 1 Trillion Yen
SoftBank has some upcoming catalysts in the near term including the Alibaba filing, which is projected to be complete by the end of this week or sometime next week. The company's Q1 2014 earnings report is scheduled to be released on May 7, 2014. SoftBank has set a target of achieving consolidated operating income of more than 1 trillion yen in the fiscal year ending March 31, 2014. In addition, the company has a small but healthy yearly dividend payout of 40 yen/share ($0.39/share), and will have future capital to initiate increases in both future dividend payments as well as to the stock buyback program.
I am confident that SoftBank is firing on all cylinders with the improvement of its core business, its other equity investments, and its large stake in Alibaba.
Disclosure: I am long SFTBY and plan on adding to SFTBY on any dips. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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