Sunday, June 22, 2014

Alibaba Listing Reviving Interest In SoftBank Shares

Shares of SoftBank are all the rage again.

The telecom service provider’s shares have risen over 7% so far this week after Chinese e-commerce giant Alibaba Group Holding Ltd. said Sunday that it has decided to aim for an initial public offering in the U.S.

SoftBank holds about 37% stake in Alibaba, whose IPO is expected to raise more than $15 billion, according to some observers.

While the actual date of listing has yet to be determined, investors see the announcement as a step forward. After rising 193% last year, SoftBank shares finally succumbed to profit-taking in January, leading to a 16% drop before this week's rally.

“SoftBank has a lot on its plate due to its acquisition plans and the Alibaba IPO, so its shares are highly reactive to news,” says Monex market analyst Toshiyuki Kanayama. “Now that the “IPO appears to be gaining traction in terms of a timetable, however, we can probably expect more volatility.”

At this point, the shares do not necessarily look expensive. SoftBank’s price-to-earnings ratio stands at about 22 times. While that is well above the average for the shares in the Nikkei 225, it is not extravagant for a high-growth stock.

SoftBank announced plans to buy Sprint Nextel(S) Corporation for $20.1 billion last fall, and is still trying to convince U.S. regulators to allow it to buy T-Mobile(TMUS) of the U.S.

There is no shortage of optimism on the prospects for Alibaba’s IPO–and the subsequent valuations for SoftBank as a result.

“The market is currently valuing Alibaba within SoftBank’s shares at an implied price-to-earnings ratio (PER) of 12 times versus the industry major average of 26 times,” says Goldman Sachs(GS) analyst Ikuo Matsuhashi in a recent report for investors.

This works out to a market value of about $50 billion for SoftBank’s stake (vs an assumed total value of $150 billion for Alibaba’s IPO). Even this figure is reckoned to be conservative, he adds. SoftBank’s current total market capitalization figure stands at about Y10 trillion ($98 billion).

Translation: SoftBank should be worth a lot more. Just how much more is the subject of debate.

Richard Kaye, a fund manager at Paris-based Comgest who co-runs a $50 million Japan portfolio, likes SoftBank stock so much he has had as much as 6% of his portfolio in it in the past before paring back his holdings. It now comprises 3% to 4% of his folder, which is the normal limit for any one issue.

“The size of Alibaba’s IPO is being constantly re-evaluated, but a $200 billion figure is not out of the question,” he says, calculating that with $50 billion in annual revenue just for its commerce business, the company’s PER would work out to just four times–cheap for almost any stock.
Under such a scenario, SoftBank’s stake might easily be worth a lot more than $50 billion.

SMBC Nikko Securities analyst Satoru Kikuchi notes in a recent report that SoftBank does not come without significant risks, including stiffer competition in Japan’s cell phone market, and a possible failure to improve performance at its Sprint unit. But even his firm has an Overweight rating on the stock.

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