Jaguar LandRover - On Cruise Control
All,
Please find our existing analysis here.
We are shelving Jaguar LandRover after the last set of numbers.
With the bonds trading in a 5-6.5% range and the conversation on the analyst call turning to dividends and a path to higher ratings, we don’t see much value in JLR bonds. We maintain the view the short-term remains positive for JLR but the transition to electrification is unproven and, at the current yields, investors are not compensated for this risk. However, we don’t see much value in shorting the bonds with net debt now approaching 1.0x and no short-term catalysts.
Investment Rationale:
- Although we would expect JLR bonds to continue to tighten over the next couple of quarters on the back of strong order/sales momentum, JLR Euro Bonds 2028 currently yield at 6%, limiting any real upside. We fully expect leverage to continue to decline, with the Company lien to pay back the front end of the curve as it falls due. However, the 2028 bonds are post the launch of the new all-electric Jaguar cars and at 6% we don’t see investors compensated for this risk.
- We are reluctant to short the bonds in the coming quarters, as we would envisage the Company will meet its net zero leverage by FY25. There is a potential for a dividend next year, but even allowing for that, there are no idiosyncratic reasons for these bonds to widen.
Current Trading:
- JLR has successfully shown strong momentum in production numbers from 1,100 weekly production numbers in Q1FY23 (April-June 2022) to current levels of 2,800 per week. This will be further increased with the new body shop installed in Solihull in Q2, which will increase capacity by a further c.20% in future quarters.
- This increase in capacity is required, with the order book at 185,000 units, albeit a reduction from c.200,000 in March 2023. 76% of the order book relates to Range Rover, Range Rover Sport and the Defender.
- Although the Company have indicated lower production in Q2FY24 (July-Sept 2023) due to summer plant shutdowns, wholesale and profitability will remain in line with prior quarters.
- JLR has continued to reduce cashflow break-even production levels down from 660k units in FY19 to 300k units in FY23 (March 2023). This has enabled strong cash flow and overall improving financials, despite volume constraints due to supply shortages.
Longer Term Plans:
- As part of their Investor Day earlier in the quarter, JLR management shared some guidance for future production and profitability. The Company expects revenue to increase to > £28bn in the current year (to March 2024) with a further £2bn of revenue by March 26. This will drive Net debt to zero from FY25, with Free cash flow of £2bn+, increasing significantly thereafter, funding investment of c.£3bn per annum.
- These numbers require the successful relaunch of the Jaguar brand, with the prototypes expected on the road by the end of this year. JLR's aim for the first of three Jaguars launched will be in 2025, all to be fully electric, initially with a 4-door GT, priced from £100,000.
Potential Issues:
- The success or otherwise of the new Jaguar brands won’t be known until 2025. JLR may miss their guidance of getting the prototypes on the road by the end of this year, but with launches not until 2025, JLR is likely to maintain its deleveraging and may reach a net cash position before the Jaguar relaunch.
- Current production has increased as semiconductor and other supply constraints have eased. These constraints have not completely gone, but JLR is now taking a more active role in the supply chain with greater visibility.
- The other potential issue is a dividend to the parent. JLR are likely to consider a dividend for FY24 (March 2024), as they guide towards a 25% payout ratio of Net Income (Profit after Tax). It is subject to board approval, but with leverage heading towards zero, we don’t see the paying of a dividend to be a surprise to the market. It highlights that JLR is likely to be heading for IG land.
As stated above, we are going to shelve our JLR analysis. We will continue to dial into the calls and monitor the name but won’t be actively following it.
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk