Aston Martin – Niggles
All,
Please find our updated analysis here.
Aston Martin (AML) cut its 2023 volume target after production issues arose in the new DB12. Volume guidance for 2023 is now close to our original expectations, so we have not changed our projections. We have updated for the actual Q3 numbers. Our model has the company breaking even by the end of 2025 (a year later than management projections). Importantly, our analysis does not show any further need for external cash. Aston Martin has a schedule of car launches over the next 18 months, and the issues for the DB12 production were a little concerning despite the assurances that there will be no recurrence.
Investment Rationale.
- In June, we took a long position of 3% of NAV in the SUNs at 108, expecting an annual yield of 10% with a refinance in November 2024. We also took a 2% NAV position in the SSNs, offering around a 9% return.
- After the latest equity raise, the SUNs will now be called at 108 in November 2023. Our return on a six-month holding period is 7.5% (23bp of NAV)
- We expect the SSNs to be called in November 2024, giving us a 9% return (18bp NAV)
- Bordering on their call constraints, these bonds do not offer much convexity, but we see the solid coupon and equity cover as a good place to park cash above inflation for little risk.
- Management is insistent that the initial production issues for the DB12 have been resolved and will not reoccur.
Q3 Results marginally lighter than our expectations.
- Revenue (£362m) and volumes were light relative to our expectations. AML also reduced its 2023 volume expectations to 6,700 units from >7,000. This volume level is broadly in line with where we had forecast.
- Gross Margins were 37%, and ahead of our model. The target contribution margin is 40%, and according to management, the DB12 will be above this level. Our target is for these levels by the end of 2025.
- EBITDA Margins reached 14% in Q3, and we expect marketing expenses to remain high in the medium term, slowing the rise to 25% forecast by management.
- Free Cash Flow is getting closer: rising volumes and more profitable models mean AML is on track to be FCF positive by 2025. Our modelling has the AML fully funded through to this point.
Production Issues with the DB12 should not reoccur.
- The ramp-up of production of the DB12 was delayed due to issues with the integration of infotainment software. According to AML, the problem has been resolved. The claim is credible, given that successful integration in one model should mean no reoccurrence in other vehicles using the same architecture.
- Nevertheless, it is a niggle given the roster of new model launches over the next few years. However, this does not change our view on our position in AML. We still view AML as funded through free cash flow generation.
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055