Aston Martin: driving a hard bargain
If another cash outflow occurs, market doubts about its future will strengthen
Convertible top down. Hair blowing in the wind. Pedal to the metal. That scenario applies both to a Sunday drive and the vertiginous ending of the 1991 movie Thelma & Louise. The career of an Aston Martin Lagonda is beginning to resemble the latter. Shares fell more than 3 per cent on Tuesday after the Financial Times reported rising short positions. They have lost three-quarters of their value since October’s stock market flotation.
As faith in the UK luxury carmaker’s growth plan dwindles, attention is focusing on its financial solidity. Aston Martin’s capital expenditure is expected to exceed £300m annually for the next few years. Net debt at June was already three times forward ebitda. Rising bond shorts anticipate growing strains.
Last month Moody’s noted an unexpected half-year cash outflow of more than £17m due to rising inventories in preparation for higher sales in the second half. The rating agency downgraded the junk bonds of the group one notch. If another cash outflow occurs in the second half, the market’s doubts about Aston Martin’s future will harden.
At the current pace of cash burn, the luxury carmaker ostensibly has enough to last well into 2021. By then its big hope, a new sport utility vehicle called the DBX, will have launched. This £150,000 SUV is expected around April next year. Supply chain problems following a no-deal Brexit could spoil that. A bottleneck late last year forced Aston Martin to draw down its bank credit line. That has not all been paid back. Indeed, by June it was almost fully used up, highlighting cash flow pressures.
The question is whether the market can expect good news on sales. Unless the global economy improves, perhaps not. How might Aston Martin then raise cash? Debt is one option. But its sterling bonds already yield 8.6 per cent, more than 460 basis points above other European corporate high-yield bonds. Its two big shareholders, the Italian private equity firm Investindustrial and a group of Kuwaiti holders, have about 61 per cent of the company. But the Kuwaitis have been selling down. They are unlikely to put up fresh equity.
With its shares down more than half this year, even a £100m rights issue would represent just a 10th of Aston Martin’s market value. Aston Martin still has gas in its tank and a highway ahead. But its options, like the heroines of Thelma & Louise, are increasingly narrow.