Softbank's 2.5 trillion yen buyback helps investors overlook profit hit

[TOKYO] Soured investments, a forecast record loss and a rating cut are not turning SoftBank Group analysts and investors into bears on the stock.

That's because they believe a massive US$23 billion share buyback plan will buoy SoftBank's shares for months to come, more than offsetting the hit from the Vision Fund's write-downs.

Masayoshi Son's tech giant last month boosted the size of planned share repurchases to 2.5 trillion yen (S$33.06 billion), to be funded with proceeds from asset sales. The stock is up 38 per cent since then, continuing to rise even after it said earlier this month that it will post an operating loss of 1.35 trillion yen for the fiscal year ended in March on hits from the Vision Fund's soured wagers on startups such as WeWork and OneWeb.

"The economics of the buyback basically trump everything else," said Sanford C Bernstein & Co's Chris Lane. "You could be a sceptic of the Vision Fund but still appreciate the effect, mathematically, of the buyback."

Mr Lane expects the shares to climb another 40 per cent from recent levels. And he isn't an outlier: The eternally bullish crowd of SoftBank sell-side analysts have an average 12-month target on the stock of 6,659 yen, more than 50 per cent above the current price. Jefferies Group's Atul Goyal sees the buyback programme giving the stock an "easy three-nine month upside".

"Retail investors and hedge funds are targeting a short-term rebound," given that the the loss isn't so large relative to the company's US$86 billion market capitalisation plus the fund, said Naoki Fujiwara, chief fund manager at Shinkin Asset Management Co.

Elliott Management in February urged SoftBank for more transparency and a large buyback to help boost its share price, which the activist investor said undervalues the Vision Fund's holdings in companies including Alibaba Group Holding. Other market participants had speculated that Mr Son would sell some Vision Fund holdings to fund share repurchases.

SoftBank had executed just 16 billion yen of its planned buybacks as at end-March, but Jefferies' Mr Goyal believes Mr Son has picked up the pace this month. The analyst estimates the company may repurchase about 250 billion yen of its own stock every month through next January, accounting for about 17 per cent of the trading volume in SoftBank Group shares.

"That's an extremely powerful tailwind," he said.

While the size of the buyback plan can't be ignored, selling down lucrative investments to cover damage from loss makers is somewhat of a double-edged sword. Alibaba currently accounts for 65 per cent of SoftBank's shareholder value, by the Japanese company's own calculations.

"A cut-down in Alibaba stock will mean weaker equity value" for SoftBank, said Masahiko Ishino, an analyst at Tokai Tokyo Securities.

Still, Bernstein's Mr Lane says details on the asset sale plan will serve as a further catalyst for the stock. He estimates that while total assets will fall, total shares will fall faster.

Depending on the amount of capital gains tax paid by SoftBank on asset sales, "we estimate 15 - 30 per cent upside in equity value per share", he said. "Probably the only real risk right now is, they've announced a buyback but they don't have the cash."

BLOOMBERG