Shares in Aston Martin Lagonda (LON:AML) declined 25% as a revised outlook revealed that a more challenging environment would lead to reduced sales. The share price declined by a quarter:
What is remarkable about this decline is that Aston Martin shares have only been trading on the main market for under a year. Since then, it has been a disaster for investors. The shares listed at £19 and slipped immediately on their debut. Since then, the share has bounced and found lower and lower lows. Today’s latest news means that the share price is well under half of the price it listed at, and it could even get worse in the coming months.
Of course, Aston Martin needs no introduction as a company. A British manufacturer of luxury cars, it is one of the success stories of recent times with an incredibly durable premium brand. It has a long and distinguished history, and despite much change in consumer tastes through the years has maintained its brand positioning as one of the very top dogs. Much of this can be attributed to its classic, timeless designs of cars which has seen it gain a very loyal following worldwide.
As soon as something says ‘Trading Update and Revised Outlook’, you can probably guess it may be bad news. It is as such:
The challenging external environment highlighted in May has worsened, as have macro-economic uncertainties. We anticipate that this softness will continue for the remainder of the year and are planning prudently for 2020.
Accordingly, we expect FY 2019 wholesales to be between 6,300-6,500 vehicles and we will continue to monitor the external environment as we head towards 2020.
Overall, this is still ahead of last year, although growth isn’t as good as what the market would like and is some way off the mid 7k figures predicted.
There are some figures included:
In addition, we have provided £19m against consultancy income recognised in Q2 2018. The commercial position on this contract has deteriorated with significant doubt remaining over the outstanding receivable. This provision will be reported in H1 2019 in Other Income.
We are also taking immediate actions to improve efficiency and reduce our fixed cost base as we head into 2020.
For FY 2019, we expect adjusted EBITDA margin of ~20% and adjusted operating (EBIT) margin of ~8% reflecting the volume revisions and provision noted above.
The first item just seems like a bad debt, and poor management. With many adjustments to the figures it is very difficult to read this. The D and A of EBITDA comes to close to £100m alone. It would have been easier for investors to have some real numbers, even if this doesn’t make for great reading.
Aston Martin should be a great reminder that we should assess businesses separately from the product. A great product for users does not automatically translate into a great company for investors. This has certainly been the case since IPO, and their 2017 figures smack of window dressing to get a good debut price.
There is a lot to be wary about in their figures, and despite the maturity of the company, it has more in common with an growth company. Profits have been erratic here, with declared losses in most years. There are no dividends at all here, which is surprising. One might presume the Aston Martin brand to be a huge cash cow. In some ways it is, as operating cashflow has been strong and growing, but hardly any of that is translated into profit. One of the reasons is that capex has outstripped this item by a long way:
Over this period, capex spend has been almost £400m greater than cash generated from operations. This obviously has repercussions elsewhere. The first being the balance sheet. It appears most of this spend is capitalised as intangible assets – this item has gone up from £570m in 2013 to £987m in 2018. This may be fair enough, as in this case the brands and other associated assets are not going to be worthless, and on the contrary, could be very valuable. In terms of tangible value per share, this measure is negative by a long way (£632m).
Another factor is that these spends have to be financed from somewhere: in this case, debt. This has climbed steadily to be over £600m and although this has falled back a bit, stood at £563m. The IPO appeared to simply facilitate an exit for existing shareholders and nothing would be done about this debt. Considering the valuation of the company at present, a future equity raise may not be out of the question.
A snippet from the warning shows that currently the company is split: good growth in the US and Asia, not so great closer to home:
In a fundamental sense there is very little to like about the company. High debts, large capex requirements, negative tangible values, a challenging macro environment allied to a big earnings multiple means that many people would have given this a swerve at IPO, and shorters would have made some decent cash.
The impression I can gather is that change doesn’t come quickly, and this is a company that is not used to being listed and therefore has not experienced any of these external pressures, instead getting on with the job of producing best in class cars first and doing the numbers second. The CEO is very well remunerated (albeit perhaps in line with other companies of the valuation, but with a measure of ‘adjusted’ EBITDA for bonus payments this could be open to some manipulation and I am sure there are better performance measures to choose.
On the plus side, there is a lot going on at the company and they are well placed to capitalise if there should be a boom market in America/Asia for their cars. To a large extent, they will be unaffected by Brexit as their type of customer is not just wealthy, but heavily so.
It also does feature a demonstrably attractive characteristic in that the business has a large moat. It would be difficult or perhaps impossible to replicate the brand from scratch (although alternatives are available). Despite this I don’t think it makes a great investment at present, and a better price will be somewhere down the line. 2/5