Aston Martin Lagonda (AML) – Positioning for the future.
All,
Please find our unchanged analysis here. We will be updating it in the coming days.
AML has resolved a major financial/engineering challenge without risking disruption to its existing partners. AML will avoid the costs of developing its own EV power platform but will pay to use external technology. This arrangement is not fundamentally different to the existing deal where AMG had agreed to provide its technology in return for shares in AML, instead, AML will now pay cash for this technology. AMG remains a partner, having waived any termination rights from the Lucid deal, but may now just be a passive shareholder. Lucid is >60% owned by PIF, and the fund has now found a customer for Lucid's technology. Useful for Lucid, given it is raising $3bn to fund the company to reach cash flow break even. The transaction will require shareholder approval at AML, we will update further when we see the offering circular. Our previous analysis has left us convinced that AML is funded through being free cash flow positive, and a refinance of its SSNs and SUNs. Today’s increased guidance is prompting us to tweak our model, however, we are not waiting for the update to complete. We are taking a position today.
Investment Rationale:
We are taking a long position for 5% in AML SUNs and SSNs. We are investing 3% of NAV in the SUNs at 108, and expect an annual yield of 10% with a refinance in November 2024. The amount of SUNs available is limited so we are also taking a 2% of NAV position in the SSNs, these offer around a 9% return. We didn’t enter earlier as we felt there were too many unknowns at AML. However, our main concerns have been addressed.
- We have liked AML before, as we are convinced that the brand name itself is worth more than the debt on it and the positive news in the last few days have us comfortable that AML can remain relevant through the transition to electric.
- Bordering on their call constraints, these bonds do not offer much convexity, but we see the solid coupon and equity cover as a good place to park cash above inflation for little risk.
- The risk of significant cash outflows on AML developing its own electric engine development was a concern for us. We are happy that AML has now opted for bought-in technology.
- AML has launched one of its six new models, and the reception has been positive. The execution risk has lowered but not disappeared.
- Last year’s rights issue leaves AML funded through to becoming free cash flow positive.
SSNs vs SUNs - Likely to be called simultaneously as part of a wider refinance.
- We prefer the SUNs to the SSNs. AML will likely do a single refinancing exercise in November 2024 when the SSNs are callable at par. The likely return for the SUNs is 10% vs 9% for the SSNs. We prefer to take the additional return as AML is funded through to being free cash flow positive.
- SSNs: Maturing in 11/2025. Currently trading at 101.25, and callable at 100 in 11/2024. The bonds are increasingly constrained. The attraction of the SSNs is that there is significantly more paper available so taking a position is more straightforward. There are $1.14bn of SSNs outstanding. The SSNs YTC is a little over 9% if called in November 24.
-SUNs: Maturing in 11/2026. Currently trading at 108 and callable at 108 from 11/2023 (and 104 from 11/2024). The SUNs will accrue three points of PIK coupon between now and November along with the cash coupon. 108 is the YTC cap for these notes. There are $222m of SUNs outstanding. The smaller size will make finding paper more difficult. Assuming a 2023 call the annualised return is c14%, falling to 10% if called in November 2024.
The Lucid electric powertrain is proven:
- AML's signing of a supply deal with Lucid lessens much of the risks from AML developing its electric powertrain. A cost of $130m in cash (and $100m in equity) over two years is reasonable as AML has £585m in cash on its balance sheet. So far, we do not know the cost per unit and how that may vary.
- Replacing AMG with Lucid does not alter our financial calculations. Our previous assumption had been that AML would adapt the AMG electric unit for its EVs. Our primary concern had been that AML would spend significant cash seeking to develop its own powertrain
- The technology works. Lucid has already successfully launched a luxury sedan, and an all-electric luxury SUV is due for launch in 2023. The SUV will compete with the DBX but not so much with the AML Sports/GT models.
- We do not know how Lucid and AML will manage the IP issues. When it was part of Ford, AML used bought-in engines before. (when it was part of Ford). AML will need to be able to work on the performance of the Lucid unit, or it will want to be able to develop it. However, a ready-made power unit allows AML to focus on integrating it into its models and facilitating the launch of AMLs first EV.
PIF/Saudi has been very supportive of Lucid:
- PIF bringing together two companies it invests in is not an accident. The PIF stake in Lucid is worth about $9bn => this is the greater focus for the Saudis, but AML is a beneficiary.
- PIF is a 62% shareholder, and the Saudi government has committed to buying 100k Lucid units over the next ten years. To facilitate this, Lucid is building a plant in Saudi Arabia.
- After a $3bn cash raise earlier this month, liquidity at Lucid is over $6bn; this should see the company through 2025 and much of the way to being cash flow breakeven.
- Lucid is still burning cash and is being squeezed by aggressive pricing from Tesla and a crowded market in the US.
Mercedes still has a role:
- We had expected AML to get its electric powertrain from Mercedes.
- The decision to go with Lucid for the electric engine will disappoint, but AML will be making petrol-driven cars through 2030.
- AMG is also developing electric powertrains to sell. If the Lucid product is difficult to integrate or if Lucid becomes financially distressed, there is the option to switch.
Geely has not commented:
Geely will eventually buy AML. We do not think any of today's news changes that.
Aengus
T: +44 203 744 7055