Aston Martin - Ignore the razzamatazz, look at delivery
All,
Please find our marginally changed analysis here.
An extended summer break due to factory works at the DBX plant dented volumes at Aston Martin (AML) but our full year unit expectations are unchanged. The works were aimed at increasing capacity and were successful. The DBX now has a challenging but achievable target of 1,160 units in Q4 (vs 849 in Q2). Additionally, AML has not yet experienced issues with sourcing semiconductor chips so far. Q3 cashflow was in line with our expectations as lower volumes were balanced against working capital inflows from deposits on new cars and lower capex as certain projects were phased into 2022. No fireworks needed, just delivery.
Volumes lower but Q4 should see a catch up
- AML chose to sacrifice some Q3volume by extending the summer plant shutdown to improve efficiency at the DBX production faciltiy in St Athan. This had a knock on impact on DBX sales. Despite Sport and GT doing better than we expected, it meant that overall production was 1,349 units when we had predcted 1,468.
- DBX volumes were 500k in Q3, this was 209k units beneath our forecast. To hit our target of 3,345 units, this will require sales of 1,160 in the last quarter. The efficiency work at the St Athan plant has raised daily capacity from 16 to 23 cars (implying a quarterly maximum 2,044, assuming 3 shift, 7-day working). We are leaving our expectations at 3,345 for the DBX and 6,378 overall. Aston Martin (AML) affirmed its c6,000 units guidance.
- Recent concerns about the worsening political environment in China around wealth have not hurt orders at AML, or other luxury manufacturers so far. The Specials division is doing better than we expected with deliveries of the Valkyrie due to start imminently. The first delivery is due in Q4.
- The law-suit against a Swiss dealer over hyper-car deposits will have a relatively modest cash impact (£15m), but needs to be managed. The hyper-cars are more important for image and overall sales than just the revenue they generate themselves. AML will not want to end up in lengthy public disputes with these customers.
DBX Mild Hybrid ready, plug in won’t arrive until 2025
- AML is not rushing the DBX electrification but has several derivatives in the wings. Given demand for the vehicle there is little evidence the lack of a full or plug in hybrid is hurting, yet. The DBX mild hybrid is ready for production and will be a China only offering (initially anyway). It will go on sale there in 2022. Derivatives with more electric capacity are in development, but a full Plug In hybrid is not likely before 2025 when the mid-cycle facelift is due for the DBX range.
Semiconductors available, no production impact.
- Our view remains that a <10k unit a year manufacturer is more likely to get its order filled than be asked to cut back. We expect that AML will continue to be able to produce. AML provides its suppliers with much of the chips required to fulfil orders to the company. The company is bullish on its ability to continue to receive supplies but did acknowledge that this was an issue management is constantly reviewing.
Results a little light but working capital and capex performance better than expected
- Lower units sold meant revenue was £238m vs £257m in our model, better mix (more high margin Specials), meant that gross margin was still 33% (vs 35% expected) giving gross profit of £79m (model £90m). Higher OpEx meant EBITDA was £17m less than modelled. This was balanced by capex being £25m lower than in our figures. This is a phasing issue, and it will be caught up in 2022 rather than Q4 2021. Cash of £492m was in line with where we expected it. Again, we expect much of the reduced sales in Q3 to be caught up in Q4.
- AML has a positive working capital cycle, and we would have expected a fall in volume to have led to a WC outflow and the text to the accounts shows this at -£26m. Actual WC moves were +£27m with most of the difference being accounted for by a rise in deposits for cars. AML looks to have managed its WC well in the quarter, we think some of this will reverse in Q4 so despite the increased unit volume, we are still expecting an outflow. This may some upside to our year cash on hand estimate of £339m.
F1 business is separately owned, but further co-operation and integration is possible.
- Although AML is separate from the F1 team, there is common control of both by the Lawrence Stroll headed consortium (Yew Tree Investments). We can see more co-operation in the future but do not see AML seeking control or anything in that direction. This includes the £200m needed for wind tunnel facilities for the F1 team at Silverstone. At present AML is only on the hook for the £20m to £25m it pays annually as sponsorship to the F1 team.
- AML is providing the chassis on a commercial basis and has ambitions to be more integrated (if not a full works team). It is building a development facility for its hyper cars adjacent to the F1 team at Silverstone. Maybe this changes in the future. Maybe AML co-invests in some projects, maybe it takes a stake in the F1 team?
Investment Rationale.
- We are evaluating opportunities to take a position in Aston Martin on the basis that the operational development and volumes so far look very encouraging despite what we see as a Q3 blip.
- In the longer-term AML still needs a lot to go right to meet its medium-term targets (10,000 units, £2bn of Revenue and £500m Adjusted EBITDA along with £250-£300m of Capex/R&D). However, we see the outlook over the next 12-18-months as being supportive for the company.
- We still estimate that the company needs to exceed its liquidity to make the medium-term guidance. However continued execution on the DBX derivatives and the Sport/GT model facelifts (2023 onward) could attract additional capital.
We look forward to exchanging ideas on this name with you.
Aengus
E: amcmahon@sarria.co.uk
T: +44 203 744 7055