Aston Martin: Avoiding wrong turns.
All,
Please find our unchanged analysis here.
We are mulling over the recent decisions at the Aston Martin board level regarding the development of the cars and the management team. Rumours of a replacement CEO have been in the press since January, but the internal appointment of an ex-Ferrari boss and the recruitment of an electrification pioneer (at Ferrari and BMW) as Chief Technology Officer hint at some new thinking from Lawrence Stroll. How this might be funded is a different matter.
Management changes possibly indicating a strategic shift:
- Our thesis has been that Aston Martin would work closely with Mercedes AMG and adapt the German company’s electric power units for the new electric Aston Martins. Deciding to go it alone would be a negative change for a company that will need to work hard to generate free cash flow. On the Q1 call, management said that Aston Martin might develop its own engine rather than exercise its option to use the Mercedes unit. The CEO/CTO appointments were framed around giving Aston Martin options. Lawrence Stroll also talked up the possibilities for the transfer of technologies from the F1 team (which his consortium owns separately). Electrification will homogenise the way power is delivered. The differentiator will be handling and design.
- Aston Martin has replaced the CEO with a 76-year-old non-executive director stepping into the role. Amadeo Felisa is a former CEO of Ferarri and spent 26 years in leadership roles there. Felisa’s credentials as a CEO are excellent, but at 76 we would expect a search for a new CEO will be coming soon.
- Roberto Fedeli who pioneered electrification at Ferrari and BMW is joining as Chief Technical Officer. Aston Martin also said that further appointments to the technical team are coming, focused on electrification.
What could this mean for us?
- If Aston spends on developing a new electric power unit the company increases the risk of running out of cash. Even if successful. The company has always struggled to generate free cash flow and diverting cash to engine development when power units are homogenising makes little sense.
- The costs of developing new engines have long been something that has pushed small-batch manufacturers toward buying their engines. With the electric engine, even once you have developed it, you have to consider the cost of developing wiring harnesses (Tesla has patented its own for example). Solving the engineering challenge of getting the best out of a proven power unit would lower the risk.
- We would prefer to see the company get its next-generation cars on the road first and then look at the electrification options. There is not unlimited cash to burn.
New vehicles are coming:
- The DBX 707: is the most powerful SUV on the market. The first customer model has now rolled off the production line. The DBX 707 is expected to generate up to 60% of unit sales for the DBX. It will improve margins for the group.
- The Vantage V12: Will be the last of the V12s. It is currently sold out after launching in March.
- GT/Sports cars: the current platforms are 7-years old with the next generation to launch in 2023. They will also form the basis for the electrification of the fleet from 2025 on.
- After 2025 Aston will start to introduce all-electric cars to its fleet. Before that, there are plans to roll out hybrid versions of various models (no details are public yet)
Timing weighs on Q12022 Results:
- Aston ended the quarter with £404m in cash vs our modelled expectation of £431m. EBITDA was £25m lower than we modelled (lower unit sales). Part of the difference is accounted for by timing and will reverse over the year. The Q1 cash flow is truncated so we will get a better insight when the Q2 numbers are published.
- Unit sales were 1,168 against our model 1,452, however, ~400 units were delayed in transit to China. This “weakness” should reverse in Q2. Aston Martin delivered 19 Specials (Valkyrie), and getting this programme delivering to customers will be a relief to management after various delays. We still expect unit sales of 6,632 for the year. ST/Sports cars are sold out through 2022.
- Gross profit was £84m or 36% (200bp above our model. We are modelling a gross margin of 38% for the year as higher price points and margin vehicles like the DBX 707 start to be delivered to customers. The SUV and the Specials have gross margins of more than 40%.
- Opex was higher than we expected and coupled with a gross profit of £12m under expectations Adjusted EBITDA of £24m vs our model of £51m. Some of this is timing related and should be recovered in subsequent quarters. We had modelled for an Adjusted EBITDA margin of 19%, this may need to come down to 17%. We will look at our model again when the more detailed Q2 numbers are published.
- Work on new GT/Sports models launching in 2023 means that R&D and Capex will ramp up to £300m in 2022 from £185m in 2021. The first-quarter figure was £67m and this will accelerate into the rest of the year.
Investment Considerations
- We have not taken a position in either bond as both are still fundamentally expensive in our view despite widening to 10% in the recent market sell-off. While AML has sufficient cash for the time being and benefits from a committed shareholder, we remain unconvinced that the existing liquidity will be sufficient to develop a new car and electric engine. While concrete liquidity concerns may therefore still be some time away, persistently negative FCF should begin to call into question the continuously high valuations of the bonds.
- In this market, we see other names with similar yields that we are more comfortable with, or which promise a clearer and swifter return to par depending on the outcome of current geopolitical events.
As always happy to discuss this with you all
Aengus
E: amcmahon@sarria.co.uk
T: +44 203 744 7055