DR. MARKUS ELSÄSSER

This year the annual general meeting (AGM) of AUDI AG was held in Neckarsulm, Southern Germany, on May 22nd, 2015. Luxembourg Value Fund "ME Fonds - Special Values" has been an AUDI  shareholder for many years and has attended the AGM. Here are some interesting facts from the meeting:

Although Volkswagen (VW AG) controls 99,55 % of the share capital of AUDI AG, the free float amounts to 192,203 AUDI shares. These are traded on the German stock exchange and represent a free float of Euro 144 mio (at current share prices of Euro 750.- for each AUDI stock).

It is a strange situation: On the one hand, AUDI is a renowned carmaker of global importance. This is widely recognized. Millions of proud people enjoy driving AUDI cars. On the other hand, it is almost a secret that one can be a shareholder of this fine company. As a consequence AUDI is undervalued in a most astonishing dimension.

Let us have a look at the 10-year history and development. The net profit of AUDI Group was Euro 824 mio in 2005.

The share price for an AUDI stock at that  time was Euro 308.- and the PE ratio was 16. A fair valuation then. Looking at the 2014 annual report, what do we see ? Net profit are now at Euro 4.4 bn, an increase by more than five times. The share price is at Euro 750.-, an increase of far less than 3 times. As a result the PE ratio today is way below 10, at only 7.3.....at the super low bottom of the international appropriate valuation range for such an outstanding company with proven track record. One can only guess at what prices the AUDI stock would be traded if it were a member of the German DAX.

Are there any justifications given for such an under-valuation? Some participants mention that there are only "so few" AUDI shares remaining that do not belong to VW AG as a reason. With regard to this argument, one should note that there are quite a number of listed companies with such a  free float of Euro 144 mio or even less in Germany, that all show normal valuations. Much higher PE ratios that 7.3....The other point is that usually shares of top class listed companies, where there are only " a few shares " left, that do not belong to the "giant" shareholder, the effect is that these last shares have a "golden status" with share prices going higher and higher. As they are a rare and exclusive commodity.

But there is another justification to be heard: Long time ago majority shareholder Volkswagen AG (VW AG) has entered into a so called "Gewinnabführungsvertrag" with AUDI, which means that only a very small amount of the yearly profits is handed out to the AUDI shareholders. In 2005 this was an amount of Euro 1.15 per share, for the year 2014 it is Euro 4.80 per AUDI share. This is a nice increase but represents a pay-out ratio of only 5% of net profits. Despite this low payment to shareholders, it should be noted though that one AUDI share is one AUDI share. There is only one class of shares. So, each AUDI share participates in the enormous increase of the value of the total company, on equal terms with majority shareholder VW AG.

The AUDI brand is the jewel in the crown of the VW-Group. It will be most interesting to observe what VW is going to do about this AUDI free float. There are basically two options: VW reduces its stake in AUDI AG, increases the free float substantially and creates a new heavy weight DAX company of international recognition for investors. By doing this VW could keep control and at the same time cash in enormous amounts of money. With a DAX listing AUDI would have a PE ratio of 12 to 15 (on a very conservative basis) at least.

Second, if VW rules out this scenario in future, then it does not make sense to keep a listing for a free float of 0.45 % of the share capital. It requires listing related costs, such as annual report, AGM, investor relations, etc....The logical step would be a take-over offer, based on the German squeeze-out rules. And then this would be based on a fair market valuation of AUDI AG company.

The current status with extreme under-valuation and neglect does not fit the first class image of AUDI and VW.