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Volkswagen holds keys to Porsche's race against Ferrari

FILE PHOTO: 75 years anniversary of German sports car manufactuer Porsche

By Danilo Masoni and Christoph Steitz

MILAN (Reuters) - Porsche AG's ability to close a hefty valuation discount to top rival Ferrari could hinge on whether its main owner, Volkswagen, is prepared to take a step back, giving the German sports car maker more freedom to cut costs and shape its future.

The maker of the iconic 911 has started the seventh quarter since its listing with a discount to Ferrari on a price-to-earnings (PE) basis just off a record 69%, disappointing hopes it could command a luxury-like valuation.

2024 is shaping up to be a transition year, as Porsche AG launches several new models, keeping a lid on margins ahead of a more promising 2025 for the company that is 75.4% owned by Volkswagen.

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That may deter fast-money investors from looking too closely at its shares, just as EV competition from China is heating up. But more patient portfolio managers are eyeing fatter returns further down the road.

Securing more autonomy from Volkswagen could be key, some analysts and money managers say, particularly if that addressed the companies' complex governance dealings.

Back in 2022, some investors snubbed Porsche AG's initial public offering (IPO) because Volkswagen's CEO Oliver Blume stayed on as CEO of Porsche AG, which they said risked conflicts of interest.

Porsche SE, the investment holding of the Porsche and Piech families that control Volkswagen, also has a blocking minority in Porsche AG's untraded voting shares.

Overall, just over 12% of Porsche AG's total equity is owned by institutional and private investors.

"Bring the free-float to 60-70%, give Porsche an independent board, and the deal is done!" said Andrea Scauri, portfolio manager at Luxembourg-based Lemanik and a small Porsche AG shareholder.

Scauri believes a more independent Porsche AG could have greater flexibility to cut costs, including staff.

"If they manage to show they can approach Ferrari's operational profitability, the valuation discount must narrow, not close, but narrow," he said.

A Volkswagen spokesperson said there had been no change in its position since last month, when finance chief Arno Antlitz said there were no plans to sell more shares in Porsche AG. A spokesperson for Porsche SE said there were no plans to buy or sell any shares in Porsche AG.

SLOW MOTION

The comparison with Ferrari - which was spun off from Fiat Chrysler in 2016 as part of a multi-year reorganisation that saw Italy's Agnelli family reduce exposure to the automotive industry - dates back to Porsche AG's listing in 2022.

Since then, Ferrari has more than doubled in market value to around $100 billion, while Porsche AG has risen by a mere 8%. At Porsche AG's listing, the PE discount to Ferrari was around 47%.

Some analysts, including at HSBC, have pointed out that a direct comparison is difficult, as Porsche AG is not a pure luxury play like Ferrari. Both, however, are symbols of European automaking prowess, and their market value is broadly similar.

Something is already moving, slowly.

The PE valuation gap has narrowed to 66% and Porsche AG shares have risen 10% since February when they marked a record underperformance of 125 percentage points versus Ferrari.

Porsche AG finance chief Lutz Meschke hinted in March the free float could be lifted in future. That triggered a 16% intraday jump in the stock following an initial lukewarm reception to results published that day.

Meanwhile, some investors see a bargain elsewhere.

Niche AM founder Massimo Baggiani views Volkswagen, in which he has a stake as part of an electric mobility fund, as a cheaper and safer way to get exposure to "the market's enthusiasm for extreme luxury".

Baggiani values Volkswagen's luxury brands, which also include Lamborghini, Bentley and Bugatti, plus other minor listed shareholdings at a combined 125 billion euros ($133 billion). That implies a potential 90% upside to Volkswagen's share price, he said.

Shares in Porsche AG, which releases results on April 26, trade at 16 times expected earnings and Volkswagen at four. Ferrari trades at 48 times.

($1 = 0.9400 euros)

(Reporting by Danilo Masoni and Christoph Steitz; Additional reporting by Giulio Piovaccari in Milan; Editing by Mark Potter)