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Aston Martin IPO: Financials should trump branding daze

Publication Date: 30 Aug 2018 - By Gaurav Sharma (Editor ReachX) By Gaurav Sharma (Editor ReachX)
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Equity Fundamental IPO & Placements Equity USA EU ex-UK Asia ex-China UK Consumer

At last motor-heads and auto enthusiasts have a chance to own a slice of an iconic British brand, as luxury carmaker Aston Martin gears up for an initial public offering (IPO) on the London Stock Exchange. However, potential investors should concentrate on financials and resist the temptation of being dazzled by its brand.

Its 105-year plus history has seen Aston Martin bag several awards, motoring competitions, and turn countless heads when some lucky owner zips past streets littered with mass produced functional vehicles. That famous fictitious spy James Bond has driven it in several of his movie outings, and celebrity A-listers love it. 

Yet, in over a century of its existence, the carmaker has filed for bankruptcy no less than seven times, has gone from one unprofitable disaster to another, and has switched hands between several owners, including Ford. It is currently controlled by Investindustrial Advisors Ltd and Kuwaiti Investment Dar, the architects of its turnaround since 2014, with former Nissan executive Andy Palmer in the Chief Executive Officer's chair. 

The word turnaround should be used advisedly. Under Palmer's careful management, Aston Martin's production is expected to rise to as many as 7,300 cars next year, the highest since the global financial crisis which hammered the luxury car market. The boss has also been proactive in introducing new models like the upcoming DBX sports utility vehicle (SUV) due in 2019 and the popular DB11, alongside plans for a range of electric vehicles focusing on the ultra-luxury segment. 

What’s more, the company is targeting an uptick in production to around 14,000 units per year. Its latest financials for H1 2018 also look good, with revenue up 14% to £449.9m and operating profits up 17% to £64.4 million. It’s also been pretty lucky that the global economy is motoring along nicely and is supportive of the luxury car market. 

All of these factors have aligned, prompting the company to seek a public listing. Reason? Aston Martin is eyeing what rival Italian sportscar maker Ferrari has achieved with its IPO. The company has perhaps longingly noted that Ferrari’s shares trade in New York at over 35 times its estimated 2018 earnings, compared with about 7.3 times forecast profit for members of the Stoxx Europe 600 Automobiles & Parts index, according to Thomson Reuters data.

Lazard is financial adviser to Aston Martin for the IPO, while Deutsche Bank, Goldman Sachs and JPMorgan Securities are arranging the sale.

Existing investors will cash in shares in the IPO leading to around 25% of the company’s stock trading on the London Stock Exchange, according to Aston Martin. That suggests little additional money will be available to the company for investing towards its production uptick programme. Daimler, the maker of Mercedes-Benz, also holds a 4.9% stake and intends to keep it in the event of a potential listing.

Aston Martin has said that much of its expansion is aimed at shifting more units in lucrative Asian markets, by upping headline sales in the region from 16% to 25. One huge plus is that if the company maintains its current margin, profits should stack up, even if production targets fall short by as much as 10% in the run up to 2020. However, the stock is unlikely to be a high-yield holding unless its aggressive expansion to emerging luxury car markets comes to fruition.

Additionally, as the global financial crisis aptly illustrated – sales of luxury cars do have a correlation with economic booms and busts. Though a bust has not been forecast, the last one was not predicted by many either with exception of a few notable contrarian economists.

And Brexit is on the horizon. Like all UK assembly lines reliant on parts imported from the European Union, Aston Martin is also exposed to Brexit. The company is stockpiling engines, some of which have German components, in the run up to March 2019. 

Aston Martin also exports 25% of its cars to EU markets and potential tariffs could hurt, albeit a lower pound would benefit it too. 

Finally, the automaker is targeting a valuation of around £5bn. The figure that is double that of market estimates doing the rounds in London’s financial circles. It means that a possible low-yield stock is unlikely to be all that cheap either. 

Aston Martin will make a likely decision by 20 September on whether or not it is proceeding with the IPO, according to a statement. It most likely will. So get ready for a commotion, but pragmatic investors should be able to ignore the rancour.

 

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