|SoftBank: Japan’s FANG Play|
The firm shows up in many of today’s big deals, and its shares can go still higher. Another 40% gain?
By Assif Shameen
October 14, 2017
Few companies have grabbed as many recent headlines as SoftBank Group. The Japanese telecom and Internet giant, which raised $93 billion for its tech-focused Vision fund, is reportedly ready to announce a $10 billion deal to buy up to 17% of ride-hailing pioneer Uber. Meanwhile, it’s negotiating to merge its Sprint unit with rival T-Mobile US to challenge giants Verizon Communications and AT&T. Earlier this year, SoftBank completed a $31 billion purchase of British chip maker ARM Holdings.
SoftBank’s (ticker: 9984.Japan) mercurial founder and CEO, Masayoshi Son, who got his start importing off-the-shelf software from Microsoft to Japan, built his empire by making big, bold bets, pouring billions into promising tech companies and patiently waiting for the results. He was an early investor in Yahoo! and turned a $20 million stake in Alibaba Group Holding into $150 billion (including profits already realized through partial sale).
In part because of all the publicity, SoftBank stock is up 27% year to date and 140% from the lows of February 2016. Remarkably, since early last year SoftBank shares have beaten most FANG stocks, with the exception of Netflix.
So is there still an opportunity for investors in Japan’s FANG-like play?
“Yes,” says Dan Baker, Asian telco analyst for Morningstar in Hong Kong. “They have a good track record, and if the Sprint - T-Mobile merger goes through, the stock will probably do very well,” he says.
A BIG REASON for the stock’s recent surge is its biggest asset—its 30% holding in Alibaba (BABA)—up 110% this year. “Alibaba stock has been flying, and that’s been a good reason to buy SoftBank,” says Baker. Its other major units, a domestic Japanese telco business and a majority stake in Yahoo Japan, also have done well this year. Sprint too has begun to turn around.
Atul Goyal, an analyst for Jefferies in Singapore, has a 14,100 yen ($126) 12-month price target, about 40% above current levels. Goyal notes the stock is trading at a 52% discount to its net asset value, or NAV, excluding investments in unlisted entities such as Chinese ride-hailing giant Didi Chuxing and ARM Holdings, and minus its net debts. “The 52% discount to NAV is too deep to ignore,” he notes. “If one adds the value for its investments in unlisted entities, the NAV will be even higher,” he says. The discount, says Goyal, is unwarranted, given the size of the company and the value of its assets.
SoftBank’s detractors argue that its huge debt load, and the capital-gains taxes it would have to pay were it to sell some of its assets, justify much of that discount. “SoftBank has been pretty up front about its debts, and they recognize that the stock needs to trade at a small discount,” counters Baker.
Investors buying SoftBank shares would be betting with Saudi Arabia and Abu Dhabi’s sovereign-wealth funds on the company’s ability to pick winners. The new Vision fund is largely backed by these funds and could be a big winner for SoftBank and its shareholders. SoftBank earns 0.8% to 1% in management fees as well as a big performance-based fee. It has put $28 billion into the fund. Analysts have estimated it could add about 7% to operating profits each year.
SoftBank, admits Baker, is now more complicated with all its equity stakes, operating businesses, and the fund. That has made it tougher to value. Hopefully, Son can better explain how it all works, and investors can reap the benefits.