Aston Martin Lagonda - Positioning
All,
We are initiating on Aston Martin. Please find our analysis here, and NEW a video recording of our Credit Committee discussion.
Having survived its liquidity challenges in 2019 and the COVID crisis of 2020, where does the road for Aston Martin lead now and how best to be positioned? Our analysis supports a rapid recovery and growth in volumes as the DBX rolls out with on-hand liquidity ample to continue investment in the next generation of vehicles. After a good Q1, by our rationale, the company should achieve its 2021 targets. However, the company will need to exceed its mid-term guidance to maintain long term liquidity and market position, which is why we are limiting the size of the investment in case future quarterly volumes disappoint.
Cash Flows:
- For now, it’s a bet on volumes. Aston Martin has been a low volume, high-cost car manufacturer for over 100 years and has never consistently made money for its investors. But with the introduction of the DBX (SUV) the company is aiming to double its output to 10k units per annum by 2025, of which it expects the DBX to represent 40% - 60% of sales over time. In Q1 the DBX represented 55%. Much of the investment lies behind us and we are looking to capture the upside.
- CapEx (incl. R&D) expenses will be high going forward as a pipeline of models has to be developed and the transition to electric vehicles needs to be performed. In October therefore, Aston signed a co-operation deal with Mercedes Benz, under which Aston will receive engine technology from AMG in return for a stake in the business of up to 20%.
- Despite the war chest of cash raised over the last year, we see a good chance that Aston Martin will require further cash injections between now and 2025, but its stock market valuation should easily cover that, in particular, if volumes remain on track and new models come to market.
Valuation:
- The stock market valuation (EV/EBITDA) sits halfway between the highs of more advanced / better run Ferrari and the lows of typical OEMs. At 10.5x projected 2022 EBITDA the valuation is effectively similar to most stories in the market, except that Aston Martin have made heavy investments (new plant, new model/category) and significant structural changes (shareholders, management, build to order) that should pay off going forward. The company is therefore operationally on a positive trajectory that should see the it eclipse its historic performance. We like the positive momentum and the low hanging fruit in the name.
- The luxury brand / James Bond premium that Aston Martin enjoys (investors must pay for) is unlikely to go away. The brand seems in safe hands and so we perceive little risk from value destruction relating to that premium.
Warrants:
- For the avoidance of doubt, the rationale is not related to today’s date. The 2LNs come with warrants that detach today. We have decided to make the investment with warrants, but it could be replicated, post detachment.
Positioning:
- We have taken a 3.5% of NAV position in the Aston Martin 2lns at a price of 112c/$, including warrants worth approx. 20c/$. As the equity trades at approx. 10.5x 2022 EBITDA we are looking to earn a return of 15%-20% through the end of the year on a successful ramp-up of sales volumes as well as the recovery of volumes in the other models.
- Due to the leverage ahead of the comparatively small 2LNs, the duration (partial PIK/2026), the negative cash flows and the partial equity nature of the story/investment, the 2LNs should carry high market volatility, which is why we are limiting the exposure to 3.5% for now.
On our website, we have included a detailed discussion and Q&A session on the drivers behind our view on Aston Martin. We are looking forward to exchanging ideas on Aston Martin with you.
Aengus
E: amcmahon@sarria.co.uk
T: +44 203 744 7055