JLR: Chip shortage a distraction, but not the main issue

All,

We will update our model once JLR report their interim Q1 financial statements.

Electrification:

- JLR numbers were a non-event and for us as the issues remain the same. JLR has sufficient liquidity, and although the chip shortages is providing some headwinds, that isn’t what we are concerned about. JLR’s main problem remains the significant CAPEX/R&D spend required to further electrify their fleet (2/3’s of produced vehicles are electrified (but 57% are MHEV, only 2% of BEV). The Company plans to spend £2.5-3bn p.a. over the coming years - and it is difficult to gauge if sufficient or not.
Chip shortage:

- Medium and long-term guidance remains upbeat and although short-term (Q2) will be impacted by chip shortages, JLR expect H2 will improve and structural challenges in the chip market will be resolved by increased capacity in the next 1-2yrs. Production in Q2 likely to be at the upper end of 60-65k vehicles (break-even is c. 90-100k), but a positive side effect of the capacity constraints means JLR can direct demand towards higher-margin products.

Results:

- The Q1 numbers have shown the Company continue to lower the break-even volume of vehicles to sub 100k.

- While short-term constraints of chip shortages will remain in the headlines, credit investors should look past this issue, given Jaguar LandRover's liquidity. However, what is still not clear is whether JLR will transition to the new era of electrification and maintain/grow their market share. There is nothing in the financials or disclosed on the call that aids in this assessment and ultimately this is the main uncertainty investors have to grapple with.

- Not surprisingly, there was little update from JLR yesterday, given they presented earlier in July with the issuance of additional debt. We will update our model post-publication, but noting its trading levels, we see limited opportunities in the short term in the name. The CFO has continued to access the market for additional liquidity at every opportunity, and with £6.5bn of liquidity and a likely £1bn out inflow from Working Capital over the coming 9 months Jaguar LandRover has ample liquidity to maintain its CAPEX/R&D spend over the coming years.

Happy to discuss.

Tomás

E: tmannion@sarria.co.uk
T: +44 20 3744 7009

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www.sarria.co.uk