JLR - momentum in race to electrification

All,

Please find our updated model on Jaguar LandRover here.

Jaguar LandRover remains an arbitrage between the current outlook versus credit fundamentals versus transition to electrification. JLR is a company that needs to transition, with 31% of current vehicle production using internal combustion engine (ICE) and a further 56% using Mild-Hybrid transmissions. With significant liquidity, record size order book and net leverage below 1.5x the starting position is promising.

JLR has an aim to be 60% pure battery (BEV) transmissions by FY30 and this transition is to be achieved by the £2-3bn of capital investment per annum JLR have historically spent and projected in the coming years. Therefore the arbitrage lies between momentum and expense.

Proactive Treasury Management:

- JLR have consistently held large cash balances, currently c. £4bn post repayment of £400m February ’22 bond. The Company have consistently worked on extending its maturity profile and once the European High Yield market reopens, we suspect the Company could seek to raise another c.€500m bond in the 7/8yr profile.

- JLR extended the £1.5bn RCF facility (which is unused) to July ’24, but we suspect later this year they will also seek to extend this further.

Upcoming Results:

- Jaguar LandRover has significant momentum for calendar FY23. The business is constrained by semiconductor chip shortages, but recent vehicle launches are successful and has increased the order book to record highs.

- In line with all OEM manufacturers, the semiconductor shortages has impacted both production and sales. The Company is due to report FY22 numbers in mid May. There are likely to be limited surprises as the Company have a good reputation for guiding the market and as part of the release of Q4 sales numbers, reiterated its expectation for positive cashflow in Q4.

- The Company confirmed the increasing order book size, now at a record 168,000 units. This is driven by primarily the momentum from recent launches but also boosted by the constraints in the supply chain (although not directly impacted by Ukraine).

- The order book for the New Range Rover and New Defender are particularly strong, with over 45,500 and 40,000 orders respectively.

- With the limited semiconductor supply, JLR has shifted production to higher margin vehicles which will boost profitability in the coming quarters.

Potential Potholes:

- JLR have successfully launched Defender and Range Rover over recent years and the LandRover part of the brand accounts for the majority of current production/sales. Jaguar has unfortunately reduced to current wholesale volumes of 13,000 in Q4. This is 30% of Q4 2019, which compares very poorly versus 60% for LandRover on similar metrics.

- There is no doubt that management has favoured LandRover vehicles with the limited supply of semi-conductor chips, given the higher margins typically available on recently launched vehicles. However, we are conscious that there is a risk of brand value destruction with Jaguar at the current time.

Positioning:

- We maintain our 2.5% of NAV long position in the 4.5% of 2028 we purchased in late February. We fully expect a strong set of numbers over the coming quarters and although we view the transition risk to electrification to be equity risk in nature, we expect decent momentum over FY22.

- With the significant backlog, JLR should have some momentum in the coming quarters, and we fully expect the CFO to raise additional liquidity to further extend the debt maturities.

Happy to discuss.

Tomás

E: tmannion@sarria.co.uk
T: +44 20 3744 7009

M:+44 7786 705 806
www.sarria.co.uk