SoftBank Group’s (OTCPK:SFTBY) stock has tumbled in recent months after the company’s headline-grabbing investments in Uber (UBER) and WeWork didn’t pan out. But the underlying value of SoftBank’s vast total business is far greater than the sum of its parts. Nonetheless, it’s not SoftBank’s stock that interests us, but the very attractive 7.4% current of a perpetual bond that trades at $1.93 and offers nearly 10 years of call protection. I like the yield of Outperforming government bonds by 550 basis points and backed by SoftBank’s huge cash flow, these bonds could easily trade above par in the coming years.
About SoftBank
SoftBank Group (OTCPK:SFTBY) is a large holding company operated out of Japan by founder Masayoshi Son and traded as an ADR in the United States. Its main business is telecommunications, but it continues to expand into a wide range of business segments (as shown in the chart below). According to the company’s website, the company’s corporate vision is to become “the most wanted corporate group by people around the world” through the information revolution.
(Source: Investor presentation 11/6/19)
for outlook. The Consumer and Enterprise segment (see above) consists primarily of revenue from telecommunications (mobile, broadband, fixed line, etc.), while Yahoo derives revenue from its media and commerce initiatives.
SoftBank also owns SoftBank Corp (a Japanese telecommunications provider of mobile and fixed-line services), Sprint (a US-based telecommunications provider and mobile network operator) and Arm Holdings (a British multinational semiconductor and software designer). We invest in various organizations. The company), SoftBank Vision Fund (the world’s largest technology-focused venture capital fund), and Alibaba (a Chinese multinational conglomerate focused on e-commerce, retail, internet and technology).
It’s worth noting that Softbank Vision Fund and Uber An investment was made in WeWork.
(Source: Investor presentation 11/6/19)
recent headlines
SoftBank shares have fallen in recent months amid negative headlines for Uber and WeWork.
(Chart source: Seeking Alpha)
For example, The Wall Street Journal recently noted that “WeWork isn’t the only company that has stumbled for SoftBank’s Vision Fund.” He also explained to CNBC that SoftBank lost hundreds of millions of dollars on his Uber investment.
But as the previous section proved, these businesses are just a fraction of what SoftBank does. And big businesses continue to generate huge cash flows and thrive, as shown in the following diagram.
(Source: Investor presentation 11/6/19)
You can argue that equities are attractive here, but in reality it’s the higher income bonds that we prefer from a risk/reward standpoint, especially given that they trade at discounted prices. is. Specifically, recent negative headlines have driven bond prices down, creating attractive upside potential (easily above par, as attractive rate perpetuals often do). can be traded to). This is in addition to a large healthy coupon payout.
About corporate bonds
For starters, let’s take a look at our favorite SoftBank bond price chart.
(source: Factset, see also cusip J7596PAJ8, cusip J7596PAK5)
It is currently trading at a slight discount to face value ($1.93) and currently yields 7.4%. Not bad at all for these bonds issued by companies with deep-pocketed warships.
Before we get into the details of SoftBank’s liquidity and access to capital, there are a few things investors should know about these bonds. First, they are perpetual bonds with no final maturity date, and second, the interest rate will reset in 2027 (which will make the interest rate 4.854% higher than the 5-year swap rate, and in 2042 the 5-year 5.604% higher than the -annual swap rate). Given SoftBank’s financial strength, these are impressive interest payments.
But very importantly, they are backed by SoftBank’s cash flow. Based on the company’s massive business empire and its strong cash flow (as you can see in the CapEx/Adjusted FCF table above), SoftBank has a significant amount of long-term funding to support these liabilities. I have. Moreover, as this next chart shows, the net leverage ratio has decreased (a good thing).
In addition, operating cash flow is very strong, as shown in the following cash flow table.
(Table source: Factset)
Moreover, if SoftBank were to find itself in a precarious cash flow position (which it isn’t now, and hasn’t even closed), it could simply sell its Alibaba stake and generate a ton of cash. Overall, SoftBank is in a strong cash position supported by strong telecom cash flow and cash flow from many additional businesses.
risk
What’s worth considering is that SoftBank faces a variety of risk factors. For example, there is no clear catalyst for unlocking the value of all of SoftBank’s businesses. However, as a bondholder, unlocking full equity value is less important as long as your cash flow supports your debt.
Another risk factor is the potential for excessive risk-taking in the Vision Fund’s preferred stock structure. For example, the We Company investment was a costly failure with a $47 billion valuation.
Keyman risk is another concern. Specifically, CEO Masayoshi Son was SoftBank’s first visionary and a key reason for its sustained success since its inception.
Yet another risk is if the Sprint T-Mobile merger doesn’t go through. The FCC has approved the plan, but some states still have to approve the contract. Sprint has a large amount of debt that is hurting the company’s stock value.
In addition, the liabilities and leverage associated with the Vision Fund’s preferred stock structure could magnify losses even if the stock were to fail due to a 7.0% annual payout (preferred stock units and other liabilities are used tactically to grow profits and provide liquidity). But it often works the other way around in the wrong environment). But to refute the argument that SoftBank has too much debt, CEO Masayoshi Son said in a previous earnings call that the group’s intention was to keep the LTV ratio under 25.0% in normal periods and 35.0% in abnormal periods. % (Implicit Loan SoftBank Group’s current valuation has a value ratio of about 19.1%).
Finally, a sustained market-wide decline could adversely affect SoftBank’s growth plans, thereby stressing the group.
Conclusion:
Recent negative headlines, combined with uncertainty about SoftBank’s complex and far-reaching business strategy, have led to the sale of stocks and bonds. Equities are attractive, but bonds are attractive from a risk/reward perspective. Specifically, we like the attractive current yield of 7.4% and the discounted price. We add these SoftBank Bonds to our list of top profitable opportunities (along with last week’s Transocean Bond article and our previous GEO Group Bond article). And as a parting thought, just because interest rates are low (and rising) and corporate stocks can be challenged and volatile, know where to look. That doesn’t mean bonds are boring or unattractive.
