Jaguar LandRover - Upbeat conference call prior to bond pricing this morning

All,

Please find our analysis here. 

We are a little disappointed the Company did not seek a longer maturity than 5yrs, with an already existing $800m bond maturing in Jan’25.  However, this issuance removes the small possibility of short term refinancing issues, with £300m falling due in January 2021.  The Company is likely to return to the market during 2021 to further extend maturities.  The risk of lack of liquidity is further diminishing, with focus returning to Brexit risks post Q2 results.  

Overall, the tone on the call was upbeat, and although a significant amount of time was spent on the springing lien covenant, it would appear unlikely that this clause will be invoked.  There is currently limited secured debt on the balance sheet and in order to refinance shorter maturities the Company is unlikely to pursue Senior Secured method.

We maintain our current position, long the Jan-26’s short the Feb-23 bonds, in a 5:3.3 ratio, and although this bond matures prior to the Jan-26 bonds, we view the increased liquidity, from this new issuance, an overall positive for the credit.

On the call, the Company guided towards Q2 (to end of September) and Q3 (to end of December), remaining upbeat about production levels and cash generation.  A couple of takeaways:

1 Working capital inflow expected in Q2, flat in Q3 and larger inflow in Q4.  This is better than our expectation, as we had expected stronger financial support to suppliers.  

2 Over the quarter, they have successfully de-stocked at the wholesalers/Dealers.  The Company sold 113k cars over the quarter, but only produced 73.5k, with the balance coming from destocking.  This de-stocking has a negative impact on profitability, but the positive nature of de-stocking on future price margins outweighs the short term impact.  

3 Additionally, unofficially, the CFO is guiding towards a lower CAPEX budget for FY21 and beyond, reducing their investment from £2.5bn to £2.3bn for FY21 and up to £3bn instead of up to £4bn going forward.  This is not a surprise and most analysts, including ourselves, had previously made similar adjustments in their models.   

Happy to discuss.

Tomas 
___________________

Tomás Mannion
2 Stephen Street
London W1T 1AN
E: tmannion@sarria.co.uk
T: +44 20 3744 7009M:+44 7786 705 806
www.sarria.co.uk