Aston Martin - Situation Evolving
All,
Please find our amended analysis here.
Two issues define how we are modelling the future of Aston Martin: a) Recent comments by Aston Martin on an electric power unit and the relationship with AMG warrant another look at the technology transfer agreement between the two. b) Aston Martin is launching three new GT/Sport models in 2023, these are new rather than mid-life facelifts, which brings execution risk. We are reminded of the introduction of the DBX, but there are important differences to consider. Both issues, as well as surrounding working capital considerations, should result in a significant evolution of the credit.
Cash flow and balance:
- We expect the AML’s liquidity to reduce materially between now and year-end when we have the company close to needing to draw on its limited revolving facilities. On top of the significant CapEx, which we have been aware of for some time, we are now modelling an incremental cash outflow of €130m, followed by a €25m inflow early next year.
- We remain fundamentally positive on Aston Martin, but credit risk has been increasing; the introduction of three new models, the potential changes in strategy regarding electrification and the future level of funding from customer deposits all contribute to the shift.
- As indicated above, we have reduced our cash flows by £105m over the next 2-years, comprising an £80m payment to AMG and £25m in the unwinding of customer deposits. Despite, this reduction, we do not foresee a liquidity issue. The low point for cash would be Q422 at £92m before recovering to £132m in 2023. Also, the AMG payment could be delayed until Q123.
- We do not expect Aston Martin to develop their own electric engine. Instead, we are modelling for an additional cash payment of £80m to AMG. The Technology Transfer agreement has £146m of headroom, which could be paid in equity (up to 10.2%). However, at today's Aston equity price, an additional payment of £80m would be needed to receive £146m of technology value. AMG wants to see its power unit in as many top-end brands as possible, so we see this as part of the negotiation between the two.
- We have increased our working capital outflow by £50m in 2022 (to -£49m) to reflect the delivery cycle for the Specials, these represent a significant portion of the deposits (the exact split is not public). In 2023 we model £25m of that deposit cash returning as buyers for the next tranche of Specials and the GT/Sports models refill the coffers.
- We have not altered our expectations for sales/revenues through 2025. Only two of the three GT/Sports models may be launched by end of 2022, but we would expect the third to be no more than a quarter later. We will adjust as necessary when the launch schedules become clear. There is a risk that the new models are not well received, and this would place downside risk on our forecasts.
- R&D spend on the next generation of the GT/Sport cars (due in 2023) will be near £300m in 2022 and £275m in the following two years (including spending on new DBX variants). The build-to-order model at Aston helps minimise the build-up in inventory as customers await new model launches. In previous incarnations, unsold inventory has led to significant discounting, hurting new model launches.
Liquidity is customer-led:
- Getting your customers to fund a large chunk of your working capital is highly efficient, however, it does expose Aston to customer confidence issues if there is any whiff of financial stress. We are not seeing this, but it will be a trend we monitor in the coming quarters.
- Cash on hand was £419m in December 21 (and £403m in March), of this €342m of customer deposits were held (£137.9m will unwind this year against deliveries of cars.
- The increase in deliveries of Specials in 2022 is part of the reason this unwinding will be faster this year (it was £90m in 2020 and £94m in 2021). We would expect an outflow this year to reflect the delivery program although, absent stress, the impact is manageable.
- At Dec 21, there were £85m in deposits that could be called by the customer under their contracts (£43m in 2020 and £79m in 2019). The extent to which customers can seek their deposits back is dependent on delivery terms in their contract.
AMG and AML drifting apart?
- It does not feel like divorce but there are a couple of (so far) minor cracks in the AML/AMG agreement.
- Stroll’s comments about developing an electric engine in house and about previously having to use outdated Mercedes cockpit technology point to tough negotiations to come. We would prefer some friction in the relationship to Aston Martin spending money on a new electric engine.
- AML has hired Ferrari’s electrification pioneer and has hinted that it could choose to develop its own electric power unit instead of using one from AMG. An internal engine development strategy if followed through would be expensive, risky, and unnecessary. However, having a potential alternative electric solution would be a valuable negotiating card for Aston. Stroll was very vocal about this on the Q122 Call.
- Mercedes F1 is contemplating cutting one of its three engine customers (McLaren, Williams, Aston Martin). Mercedes does not see the business case as compelling. The Aston Martin F1 team is separately owned by the Yew Tree consortium but there is a lot of scope for Stroll to co-mingle the two.
2023 new GT/Sport models:
- Aston Martin is looking for the GT/Sport models to produce 4,000 units of demand per annum (with the DBX providing 6,000).
- Stroll has been critical of the deal with AMG that restricted the use of new technology in AML’s cars and that the new models will differentiate from Mercedes. As an example, Stroll was unhappy that until now, Aston was not able to use touch screens.
- The Vantage, DBS and DB11 will be significantly updated. The Vantage and DB11 will use AMG engines. The DBS will continue to use the Aston V12.
- Launch will be at the end of 2022 with models being delivered to customers from 2023. The exact timings will become clear nearer the launch date. It is also not yet certain whether all three will launch together.
Investment considerations:
The SSNs currently yield 11.2% (98c/$), but we are concerned that the deteriorating liquidity picture between now and year-end, will prompt creditors to sell this name further. For instance, if the SSNs fell to 90c/$ (from 98c/$ currently) this would equate to 15% YTW, which better reflects the equity nature of the story and would prompt us to go long the SSNs.
- 22Q2 results and new vehicle unveiling (in Q3) will be the next major catalysts. The diversion of cash to developing an electric power unit remains a potential concern, however, our thesis remains that AMG will provide that unit.
- AML is a highly recognisable brand and would be attractive to larger OEMs; we have assumed a minimum EV of £1.2bn (5x our 2022 EBITDA forecast). Outside of distress, we would see EV at nearer 8x, which gives an equity cushion of >£1bn.
- We are modelling YE22 net leverage at 4.8x vs 4.2x originally (although the £80m modelled payment to AMG could be shifted to Q123). We expect cash of £92m at year-end rising into 2023 helped by a build-up of deposits on new models.
-Successful introductions of the new GT/Sports models and not diverting cash to new engine development is crucial to avoiding the need for any additional cash call in 2023
I look forward to discussing this with you all.
Regards
Aengus
E: amcmahon@sarria.co.uk
T: +44 203 744 7055