Aston Martin: Turn on the fog lights.
All,
Please find our unchanged analysis here.
In simple terms, someone offering to inject £200m of fresh cash behind the bonds is good news for the bonds. But is it so easy? The timing of the recent FT article is curious and had us revisit our model and in particular our assumptions on volumes and strategy. While the company itself has not yet offered any specific insight, we have more than a few ideas as to what AML may want/need to spend further money on. From the bond’s perspective, the main distinction here has to do with what is required and what is extra.
What is the rumoured cash being sought by AML?:
- A possible equity raise of £200m from Saudi Arabia.
- It isn't entirely clear if the full £200m is for investment in AML. Saudi Aramco has a reported call option of 10% on the separately owned Aston Martin F1 team.
CapEx:
- If AML now wants to develop its own electric power unit, it would require a much higher CapEx budget and £200m would at best suffice to develop its charging socket.
- Nevertheless, there has been some friction in the AML/AMG relationship given the comments around the Q1 trading statement. AML has also hired the architect of Ferrari’s electrification strategy as Chief Technology Officer.
- On the whole, then, this would be a major departure and we’d probably have heard of it. The amounts do not seem to stack up, nor does the alleged investor immediately evoke images of electrification.
Underlying trading:
- We have been modelling a strong cash outflow into year-end, but nothing that would require additional funds - at that time or at a later date.
- AML stated that its 2022 trading was in line with expectations. On the one hand this statement should have been more positive, if true. On the other, it doesn’t suggest a gaping £200m cash hole. As such, we have not yet changed our projections.
- Our analysis is that the company has sufficient cash to complete the proposed new car launches. Further cash could be needed for the new models if a) there are unforeseen outlays around developing and manufacturing the new GT/Sports models (for example, the DBX had a difficult birth) or b) DBX sales are not picking up fast enough. AML has said DBX orders are up 40% and that disappointing Q1 unit sales were a blip due to delayed inventory delivery to China. So, given Shang Hai logistics have not improved in recent weeks, there is probably some risk here.
Customer deposits:
- AML relies heavily on customer deposits for funding. At December 21 the company had £400m of cash, including £340m of customer deposits. Of those. £137m are expected to unwind this year, but we consider a balance of £270m quite adequate to run the business and - all else equal - outflows should slow from there.
- However, current market turmoil might be triggering higher than usual cancellations. It is possible that delays force the company to accept cancellations - in particular since this year’s bonus pools look dry. This could put deposits under pressure.
- Moreover, three new models are due to be unveiled in Q3. Deliveries are due to start at the end of the year with AML adamant that it will meet its schedule. Delays in the launch would put back deliveries and payments for the new models and hurt the path to free cash flow generation.
- If deposits are under pressure the liquidity at AML could evaporate more quickly than our modelling anticipated. The production run of GT/Sport cars for 2023 is sold. In this luxury market we would be surprised if a reduction in customer deposits is prompting a liquidity crunch, but we cannot rule it out - and perhaps neither can AML.
- This then seems to be the most likely source of concern and raising some additional funds - while you can - is perhaps a good idea.
Debt or Equity:
- The SSNs are already yielding 16%. Under the covenants £200m of debt could be raised, but the debt would be costly.
- Under its bond covenants, AML has several carve-outs that could allow additional debt, £150m of Securitisation debt. There is also a carve-out for a further £50m of secured debt. Management has previously complained about the high coupon on the bonds.
- Debt would be less expensive than the dilution from new equity. Raising £200m equity against a meagre £500m market capitalisation hurts. But rights are also cheaper to follow and it’s easier to own more of the company. I’ve you’ve liked the shares then, you must love them now.
Investment considerations:
- At the current equity price of £4.35, market capitalisation is now £500m. An equity issue with a 10% discount would dilute existing shareholders by 44%. If AML is contemplating raising equity, that points to a critical cash situation.
- The SSNs yield 14.3% (91c/$), which reflects some of the name’s equity nature. AML’s value lies in the brand name and in the value it would have to a bigger OEM, rather than the cashflow it can produce on its own. Aston Martin 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). Until such an exit is found however, sudden unforeseen liquidity requirements can cripple any return calculation. So we are in no particular rush at the moment.
Aengus looks forward to discussing this name in detail with you all.
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003