JLR - Looking further down the road - positioning
All,
Please find our unchanged analysis here.
Jaguar LandRover management has a good reputation for guiding the market and with its significant liquidity, there are no short term concerns for JLR. Our focus isn’t on the short-term concerns of supply issues and inflationary pressures which are well documented and we expect JLR has the momentum to withstand. Our analysis remains on more medium-term concerns.
What to do with Jaguar?
- Even management acknowledged that the Jaguar segment of JLR is a little lost and needs repositioning. The majority of the CAPEX and development spend is on LandRover and the backlog of orders demonstrates the reward JLR are reaping from this investment. Recent launches have boosted order levels to all-time highs and the recent launch of the New Range Rover Sport will no doubt further boost orders and sales in the coming quarters.
- But when was the last time a Jaguar car was launched? The Jaguar XE was refreshed in March 2019 with the i-Pace in July 2018. The Jaguar F-PAce was refreshed in FY21 but all these changes are small refreshes rather than full relaunches similar to the Discovery or Range Rover.
- Jaguar has planned a new Jaguar BEV ln 2025 on JLRs new dedicated architecture. All Jaguar cars are likely to be 100% electric from 2025, but there is limited visibility on the success or otherwise of this project.
- Ultimately, we remain concerned about the direction of the Jaguar brand.
No Problems at LandRover:
- Thankfully for investors, the LandRover segment continues to grow its order book. Investors can take comfort from the fact that recent investments spent on new designs have been well received by the market and during FY22 (ending in March) the order book has continued to grow.
- We see no reason for this to not continue into FY23, with the launch of the new Range Rover Sport likely to bolster order books in the coming months.
- JLR focuses production on newer models, they have been in a position to bolster EBIT margins and cash flow during FY22.
Recent Results:
- Topline sales continue to be constrained due to semiconductor chip shortages overall performance is in line with expectations. Cash flow continues to improve due to better wholesale volumes and lower marketing and warranty costs.
- The order book continues to hit new records with the recently launched Range Rover and Defender both contributing to the order book. The launch of the Range Rover Sport will further boost the order book in the coming quarters.
- Working capital was a large £1.2bn outflow in FY22, due to the lower production/sales volumes, especially in H122.
- The business continues to benefit from significant liquidity with cash balances of £4.4bn and availability of £1.5bn under its RCF. (RCF availability is £2bn, but reduces to £1.5bn in July 2022).
Outlook:
- Chip shortages are expected to marginally improve in FY23 but will impact and constrain production for the coming quarters. Coupled with the wider supply issues surrounding covid related lockdowns in China, there will be a limited improvement in the current quarter.
- Management is confident on FY23 targets of 5% EBIT margins and £1bn+ free-cashflow. The FY23 guidance compares favourably to reported FY22 numbers of -0.4% EBIT margins and £1.1bn cash outflow.
- However, they cautioned about the headwinds expected in Q1. The supply chain issues related to Covid lockdowns in China and the switch over to the New Range Rover Sport are both likely to limit any volume increases and Q1 could experience negative EBIT margins and negative Free Cashflow.
- Although Q1 is likely to be weaker, we share management’s confidence on the momentum of the business, which is underpinned by the large order book. The business continues to reduce costs and the warranty reduction bodes well for future cost savings.
- Longer-term, management continues to target double-digit EBIT margins by FY26, and the resulting improved cash flow reduces the net debt close to zero.
Longer-term issue:
- It is on the longer-term outlook that we differ from management. There are few signs currently on view to justify such an increase in EBIT margins as envisaged by management.
- We remain concerned on two fronts - electrification and the relaunch of the Jaguar brand.
- On electrification, JLR currently report that FY22 sales were 66% electric, however, only 11% are BEV or PHEV, with MHEV making up the balance. JLR expect to phase out pure ICE vehicles by FY26, with the total BEV mix increasing to 60% by FY30. This is an ambitious target and JLR would need to double its BEV output by FY26 to be on target.
- Linked to the electrification issue, the relaunch of the Jaguar brand is likely to need further significant investment. Currently, the Jaguar brand is lost and although an iconic British brand, without recent launches JLR may find it difficult to maintain its allure.
- JLR wish to modernise and “reimagine” Jaguar in the luxury space targeting wealthier and younger urban-minded customers. However, this space is extremely competitive with several iconic brands targeting similar demographics.
Investment Considerations:
- We are unwinding our long 2.5% of NAV position in the 4.5% bonds maturing in 2028. We took this position as part of a long risk strategy in late February, which obviously, in hindsight we got wrong.
- As we have written above, we have no concerns with JLR over the short term, and despite the likely weaker Q1 numbers, we are comfortable with management’s guidance for FY23.
- Our concerns remain on the long term issues facing JLR, surrounding Jaguar and the transition to electrification. However, we don’t envisage any movement in these concerns over the coming months.
- But we are still unwinding our long position, due to the lack of any short term event facing Jaguar LandRover. We expect the bonds will trade in line with the market with limited idiosyncratic risk.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk