Jaguar LandRover - transition time
All,
Please find our unchanged model here. We will update our model over the coming days.
Liquidity can fix a lot of problems. With over £4.5bn of cash and £2bn of undrawn facilities and gross debt of £8bn spread over the next 8 years, there are no liquidity concerns. Short term outlook for Jaguar LandRover remains positive.
Transition to 100% electric:
- However, the reason for the large cash balances is that the auto industry is going through a step change.
- Gross leverage is a less favourable metric for credit investors and bondholders have no trigger to control cash balances dwindling.
- JLR expects to achieve zero net debt in FY24, and it will be interesting to see if this is achieved by increasing cash balances or decreasing gross leverage. That will be the biggest indicator of the level of confidence management have in adapting to the step-change in the industry.
Q3 Results:
- We were buoyed by yesterday’s JLR Q3 results, as the Company continued to increase order bank, production increased on the back of chip shortage starting to dissipate and the positive EBIT in Q3, in line with guidance (technically the guidance was for positive EIBT for H2).
- JLR have lowered their break-even unit produced to c.70k, as they prioritise the sale of higher-margin vehicles over more basic models due to chip shortages.
Q4 outlook:
- On the chip supply issues, JLR expects shortages to continue, but gradual improvement should be visible throughout 2022 as expected increases in capacity start to come online.
- The order book has increased from 125k to 155k, with 31k orders for the New Range Rover. Deliveries should start in Q4.
- Both of these combined should see an increase in topline over Q3, which will lead to a higher EBIT margin.
- With the number of vehicles sold increasing, this will lead to a positive Working Capital swing. Coupled with the normal Q4 inflow of working capital, the business will be Free cashflow positive for Q4.
New Deal?
- Normally, after Q3 results there would be a long wait to full-year results, with JLR’s likely to report in Mid May the full-year results to March ’21. However, despite improving liquidity with a second 5yr UKEF guaranteed facility, totalling £625m, we expect JLR are likely to access the High Yield markets in the next couple of weeks to further extend their maturity profile.
- There is no urgency on the Company’s behalf, with £4.5bn of cash and £2bn of undrawn RCF, they do have a £400m bond falling due in February and further c.£400m bank loans repayments. Therefore we expect the Company to come to market with either a 5yr or 7yr deal, to extend the maturity profile. This is likely to be done with some further bullish comments re: chip supply and order book size.
- The Q4 outlook above is a strong background for JLR to launch a deal.
Investment Considerations:
- We will update our model in the coming days, but we remain positive on JLR in the short to medium term.
- Our concern for the long term centres on one particular graph, the JLR Powertrain Mix. JLR have 69% electrified in Q3 2022 which appears positive, the balance of 31% old ICE (internal combustion engines). However, only 3% of vehicles are fully electric, with 56% of the retail sales MHEV (Mild Hybrid Electric Vehicles). The transition to fully electric is a significant risk to any bond investor.
- We don’t see current long-term yields of 4.5% sufficient to compensate for the transition risk.
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
M:+44 7786 705 806
www.sarria.co.uk