Aston Martin: Searching for the point.
All,
Please find our slightly updated analysis here.
The offering circular from Aston Martin (AML) earlier this week provided clarity on the timetable for the company’s upcoming Rights Issue. Having updated our model for the effects of the upcoming RI and buy-back, we preparing to position ourselves along a recently formed thesis.
Buyback supportive of the bonds:
- The Rights Issue is one credit positive and the decision to specifically allocate some cash to debt reduction is another. Management intends to buy back debt utilising up to half the cash raised. We expect the buyback to occur early in Q3.
- We expect AML to focus on the SSNs ($10.5%/2025). AML will be able to redeem £330/$385m nominal at 110.5 (plus accrued interest) under the equity claw clause. The 2nd Lien coupon is 8.89% cash (the remaining 6.11% is PIK). Management has spoken about reducing cash interest by £30m and this is more easily managed through the redemption of the SSNs but the downslide case of a x-allocation is also a possibility. The 2nd Liens are now priced at 110 which betrays an assumption that some of the cash will be directed to a partial redemption. Of the subordinated notes.
- AML could choose to tender for bonds at a price below 110.5, however, it would have the potential for a tender falling short and ultimately costing more and taking longer than a simple repayment.
- We see the SSNs as an attractive 3-year risk. The clean price is currently around 99.5 => a yield of 10.7%. The bonds did yield >14% before the Rights Issue announcement. Our modelling has AML with 1. £300m of cash on hand at year-end; 2. 2023 will benefit from some working capital unwind; 3. 2024 will see the company move into free cash flow generation regularly; 4. the value of the brand is sufficient to cover the bonds in extreme circumstances, as demonstrated by the willingness of PIF to invest and Mercedes to follow their money.
- If AML uses around 50% of the net proceeds for debt reduction this would equate to around 29% of the nominal value of the $ SSNs.
AML determined that this rights issue gets done:
- 44% of the shareholders have already agreed to take up their rights with the remaining issuance underwritten.
- Our estimate is an offer at 325p which assumes a 30% discount to the price on the day the circular was issued. This would lead to a 1.3:1 issuance ratio and would imply a theoretical value for the rights of 61pps.
- The resolution prepared for the shareholder's meeting would allow management to issue shares as low as £0.10 (the nominal value)
AML is financed through to the SSN maturity:
- Our assumption is for £300m of CAPEX a year.
- On that basis, AML now has sufficient cash to fund itself beyond the maturity of the SSNs. Post the Rights Issue our model predicts c£300m in cash through the end of 2022. From there until maturity, we assume that OCF will be entirely consumed by CapEx and a reduced interest bill, which allows for a significant increase in CapEx vs previous years and gives us a liquidity low-point of just under £300m.
- Working capital outflows due to supply chain disruption have been meaningful this year and will not completely reverse.
- We model some reduction in working capital with modest inflows in 2023. By the end of 2024, the company will start generating free cash flow regularly.
- A proportion of the working capital outlay this year will stay invested in the supply chain to remain capable of dealing with disruption. However, this does not change our views on liquidity through the maturity of the SSNs.
- The risk of poor reception for the new GT/Sports cars remains, but the execution of model development has been good since Stroll took control of the business.
- We expect meaningful cash flow at AML will begin in 2025. However, post-buy-back, the brand itself should cover the value of the remaining SSNs even more comfortably than now.
The rights issue is expected to complete by the end of September:
- Cash raised from the placing of shares with Saudi Arabia together with the Rights issue is expected to be £626m (after £27m of costs).
- 5-Sep Prospectus published.
- 8-Sep Shareholders meeting.
- 27-Sep Results of Rights Issue announced.
Investment Rationale:
- We are preparing to buy the SSNs, but having regard to the uncertainty surrounding AML in the last three years, we would rather pick up the bonds sub-par. AML is still in the process of a business transformation with new GT/Sports cars launching in 2023, there is execution risk and we need to see a return above 10% to compensate us adequately. The cash coupon of 10.5% reduces duration on these notes, promising a relatively solid basic earrings stream in otherwise uncertain times that we would be ready to take on the books now - or soon.
- Despite being rated CCC, Aston Martin is not in distress. But because the “triple hook” reduces the investor pool, the SSNs were heading back below par prior to the publication of the offering circular and we are inclined to bide our time on the expectation they return to that trajectory. At a 99c/$ we will be looking to start building a position for 5% of NAV.
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055
www.sarria.co.uk