I mentioned in my portfolio half year review that I had taken a new position in Softbank and here is the full thesis. Softbank (TKS:9984) (ASE:SFT) is a Japanese telecoms company and is one of the largest in the world. Investors may know the company because of its 36.3% holding in Alibaba (NYSE:BABA) and 80% ownership of US telecoms company Sprint. The investment thesis for Softbank is relatively straight-forward. It currently owns a stake in Alibaba worth ¥9.6tn, yet its market cap is only ¥8.8tn. In addition to the Alibaba stake however, you get an 80% stake in Sprint (NYSE:S), a 43% stake in Yahoo Japan (TKS:4689), and operating businesses with net income of ¥720m per year.
Softbank is quite a complicated holding company with percentage stakes in a variety of businesses, which make unpicking its financials difficult. This may be one reason for the steep discount to its holdings.
I find it easiest to think of Softbank in the following simplified segments
Mobile Comms segment: Net income of ¥609m, growing circa 18% p.a. though with acquisitions
Fixed line telecoms segment: Net income of ¥109m, mature industry with slight declines in revenue
Sprint equity holding: Market value of 80% stake is ¥1.8tn
Yahoo Japan equity holding: Market value of 43% stake is ¥1.3tn
Alibaba equity holding: Market value of 36.3% stake is ¥9.6tn
To come up with a value of the operating business I have valued them based on net income rather than as minority equity holdings. For the mobile comms segment I apply a 12x multiple to get a value of ¥7.3tn which I feel is fairly conservative. For the mature fixed line segment I attach an 8.5x multiple to get a value of ¥926m. After adjusting for minority interests, I get a total valuation of ¥7.4tn.
Debt: Softbank is at first glance a very indebted company, with net debt of ¥7.2tn. But this includes the consolidated debt of the three equity holdings above, which you should ignore when valuing using the equity method. Sprint has net debt of ¥3.7tn, and Alibaba has net cash of ¥1.4tn. Yahoo Japan’s net debt is around 0, so in total Softbank’s “operating” debt is ¥5tn.
This gives me an equity value of the operating business of ¥2.5tn (Total value – net debt).
Adding this to the equity valuations above gives me a total valuation for Softbank of ¥15.1tn vs current market cap of ¥8.8tn.
To be honest I’m not too interested in Softbank as a business, or Sprint, but I am very interested in Alibaba. It’s currently valued at a P/E just over 50, but I think this is actually quite fair for what is a giant company still growing at a phenomenal rate. If you had invested in Google back in 2004 when it was trading at a similar P/E you would have earned very nice returns. I would ordinarily buy a stake directly in Alibaba, but at this price Softbank appears to be selling for just its Alibaba stake with the rest thrown in for free. Therefore I think it’s a better value proposition than just Alibaba and should increase in value along with Alibaba.
Tax & Japan
One final note I will make that could be possibly holding back the price of Softbank is the tax that would be due on its Alibaba gains should it sell. However I don’t think it’s likely they will sell the stake, and even if they decide to divest I think they will do a spin-off in a similar fashion to that done by Yahoo with its Alibaba shares to avoid capital gains taxes.
Shares trading in Toyko have a minimum lot size of 100, and as I didn’t want to make Softbank a large position I have instead invested through its Athens shares trading under the ticker SFT for around €52.
Disclosure: Author is long ASX:SFT