I’ve been doing some analysis while being furloughed and figured you guys might be interested in having a read.
Let me know what you think! I love all feedback. Hopefully it’ll inspire some questions, I’m looking forward to what you have to say.
The stock has been in a downward spiral since it became publically available back in October 2018. Let’s see who is in the driver’s seat and where they are going.
Who is Aston Martin Lagonda?
Aston Martin Lagonda is an independent luxury car group. Over 100 years of experience across two brands. One of the few British car companies left, much less publically listed.
Aston Martin, created in 1913, is named after a race when Lionel Martin took on the Aston Clinton Hill Climb in and won. They brought Lagonda in 1947. Both companies have a rich history of racing and fast luxury cars. We’ll find out if that is enough for them to survive in the modern world.
AML makes its money by making luxury cars such as the DB range. They don’t have as robust an organisation as some of the manufacturers who control more of the supply line to a wider audience. Their sole focus is on producing and selling new cars, both to wholesale and retail (online and with their showrooms.)
Aston Martin has also recently (rejoined) Formula One, however, this is not a revenue opportunity, rather an exercise in brand exposure.
The Starting Line Up
Not all car manufacturers are equal, and some have a bit of a head start when it comes to their fundamentals. To keep it brief and help frame the investment, we’ll give each firm a quick MOT.
Horrifically poor quality, high debt, no shareholder payouts. Even with the massive share price slashes, still an expensive buy. An extremely weak outlook for future revenue and earnings.
A good comparison as both companies are luxury brands focused on racing. High profitability but also heavily loaded with debt. Very expensive to buy shares right now. Also, an extremely weak outlook for future growth.
Not as profitable as their peers but paying money out to shareholders makes this more attractive. They are considered very cheap to pick up right now as well. They have a weaker outlook but still mildly better than the others here.
We also have Ford, BMW, GE, Daimler, and even Tesla. Aside from Tesla which doesn’t follow the fundamental rules, the larger companies largely follow the same pattern of Volkswagen. Currently at a discount due to COVID-19. However, Aston Martin is not considered cheap like it’s peers.
The Share Price
I mentioned the declining price since they became a public company.
Source: Guardian Aston Martin’s troubled flotation
Plagued with false starts and cash flow troubles, Aston Martin finally had some good news in 2018 when they reported their first-ever profitable year. However, the rose-coloured IPO was short-lived.
What has been causing the recent issues though? How hard hit was Aston Martin?
Aston Martin Lagonda confirms that it will be raising gross capital proceeds of £536m through an equity raise, including a private placement of shares for £171m to the Lawrence Stroll led Yew Tree Consortium (as part of their total investment of £262m) and a subsequent rights issue.
Show Me The Money
Why have they raised additional capital? The share price woes lead us perfectly onto the financial situation at Aston Martin. In the same announcement, AML had to share some uncomfortable news.
COVID-19 has hit them hard and stopped all production on the new SUV, delaying their entrance into the market even more. Given how much is riding on this and not letting customers cancel their pre-orders, it’s a touchy time.
It gets worse. Due to the regulation, a company is either has enough working capital for the year or it doesn’t. There is no middle ground. Aston Martin has been forced to announce they do not have enough working capital and the investment was part of a cash injection to solve these issues.
They have a few options to help provide some comfort. Additional funding facilities of approximately £150 million. The option until 8 July 2020 to draw up to $100 million of the Delayed Draw Notes issued on 8 October 2019. Discussions with the UK government concerning the potential support packages available to businesses to trade through the pandemic.
When it comes to financing you want to make sure you have the best people on the job. Mark Wilson, the Chief Financial Officer, has now stepped down. Aston Martin currently has an interim CFO. Additionally, three directors are stepping down and not seeking re-election. Meaning the company setup is no longer compliant, thus a new search for independent board members is underway along with trying to source a CFO.
After some heavy investment into a new factory, and with pre-orders for their first SUV sold out, this is the worst time for Aston Martin to deal with a lockdown.
The lack of diversification across their revenue lines, and issues with potential customer cannibalisation, are all impacting their ability to sell more cars. Compound this with the financing issues and they can’t make the new cars to sell.
In 2019 they also started a voluntary redundancy and early retirement programme actioned which resulted in a 22% reduction in year-end headcount. The main is by 2021 to save over £10m in operational costs. With an operating profit margin of 0.05%, they are not in a strong position when it comes to profit generation.
With £19m cash flow from their operations and £243m coming in from financing activities, cash flow conversion is a serious issue for them. They are currently in almost £1bn worth of debt and currently reporting a pre-tax loss.
Buy While It’s Cheap?
Sometimes buying a distressed company means you can pick it up cheap. As Mr Buffett likes to say, buy a great company at a good price.
Sadly, due to the loss-making nature, high revenue, and poor cash flow, Aston Martin is not an attractive company based on its share price ratios. Price/book of 27.28 and Enterprise value/EBITDA 28.50.
First Place Finish In The Future?
Often when I talk about distressed assets I talk about it as an opportunity for a long term investment. Taking a risk now to buy the company on the cheap to enjoy its future growth.
This is not the case with Aston Martin.
With very weak future revenues, (the deposits for the new cars have already been taken and it’s assumed a large number will convert already.) Earnings in the future are also very weak, the operational issues have not been solved and the margins are too tight.
Aston Martin need to streamline the business and they recently did some expansion, plus losing key members is not helping the transition.
The sell-side analysts have a very disappointing outlook. With many showing a lower target price than Aston Martin is currently trading at.
With the Q1 2020 results expected this Wednesday, 13th May 2020, we’ll see the full scope of the damages.
Why A Sell?
If I was holding Aston Martin I would be looking for my moment to sell sooner than later. I have a very low expectation for the announcement this Wednesday, and I don’t see a recovery any time soon, if ever.
The best outlook for Aston Martin would be an acquisition. However, who would want to buy the brand while it is heavy with debt and struggling to optimise its business?
The added brand exposure from the Formula One is unlikely to move the needle and might be a bigger expense than expected. The bottom teams are paying more money than they make, and that’s likely how Aston Martin will start the session.
Let me know what you think about my write up and analysis. Any parts you would want me to focus on, or bits you want me to cover?
Stay safe and thanks for reading!