Aston Martin - Value vs Volumes
All,
Please find our updated analysis on Aston Martin here.
Following AML's liquidity challenges in 2019 and the COVID crisis of 2020 our analysis finds 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 volume targets.
Cash Flows:
- Aston Martin is a bet on volumes. The luxury OEM 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 in the past now and investors 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 succeed. 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. To maintain long term liquidity and market position, the company will need to exceed its mid-term guidance. However, its stock market valuation should easily cover that if volumes remain on track and new models come to market. In such a scenario we see the company raising (yet more) equity.
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 like 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 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. But given that a DVF valuation of AML would find zero value for investors, it is really only the brand name and growth expectations that underpin its EV today.
Investment Considerations:
- We are not taking a position in Aston Martin. After a first idea around the 2LNs did not work, we find both bonds are trading tight and see the value in the equity instead. Unable to buy straight long equity positions on their own (no distress/restructuring), we are watching from the sidelines for now.
- If we were equity investors, however, we would be taking some of those shares, as we see volumes very positively.
- 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