Shares in Aston Martin Lagonda finally went under the hammer yesterday, but it was an inauspicious introduction to public markets for the luxury carmaker. The owners of Aston Martin had been hoping to sell for as much as £5 billion, but fell short of this by floating with a £4.3 billion valuation — and then saw the company’s share price fall on the first day of trading. Aston Martin shares almost immediately traded below their issue price of £19 and closed the day down 4.7 per cent, or 90p, at £18.10.
Shares in the company become available to individual investors on Monday, but the first day of conditional trading posed more questions about whether you should be looking to buy or should leave well alone.
Strategy
Aston Martin was founded in a London workshop in 1913 by Lionel Martin and Robert Bamford. Associated with the cars used in James Bond films, its models include the DB11, Vantage and the DBS Superleggera. Aston Martin has two main factories in Britain, in Gaydon and Newport Pagnell.
The company is opening a new factory in St Athan, south Wales, which will be the focus of its plans to produce an electric model. It is also pushing out its super-luxury Lagonda marque.
Aston Martin has sold itself as a growth story to prospective share buyers, which, given the growth in middle and upper-class consumers around the world and the undoubted quality of the company’s cars, looks entirely reasonable. It is aiming to double its present output of 7,000 cars a year to as much as 14,000 by 2022.
The company’s cars have an average selling price of £150,000, but it also produces special edition models such as the Vantage GT12 and Valkyrie hypercar, which is expected to retail for about £4 million.
One of a kind
Despite its potential, valuing Aston Martin is perilously difficult. For a start, it is the only car manufacturer listed on the British market. The company has claimed that the closest comparison is probably Ferrari, the Italian carmaker listed in New York and valued at just under $26 billion. Ferrari shares are highly rated, trading on a little more than 20 times last year’s adjusted pre-tax profits. However, it has a clear track record as a listed company.
As its stands, Aston Martin’s shares value the carmaker at an incredibly demanding 204 times this year’s expected post-tax profits of about £21 million, according to a consensus forecast that has been circulating in the City. That falls to a more realistic 14.4 times profits, based on predictions for its earnings in 2021.
Incidentally, in spite of the early anticipation, it’s touch and go whether Aston Martin will make it into the FTSE 100 at the next reshuffle at the end of the year. As it stands, its £4.3 billion valuation is ahead of companies at the bottom of the index, such as Royal Mail and Rightmove, but it is close. If Aston Martin makes it into the top 100 it could be a boost for the share price as it would make it a compulsory buy for index trackers.
Research and development costs
At first glance, Aston Martin, which has gone bust seven times in its history, is in rude financial shape. It has increased its revenues substantially since 2015 and turned years of losses into a pre-tax profit in the most recent financial year. Its accounts state that it generated more than £340 million of cash last year, four and a half times more than in 2015.
However, if you peek beneath the bonnet Aston Martin’s finances look more complex. As pointed out in an analysis ahead of the listing by Quest, a division of Canaccord Genuity, Aston Martin capitalises about 95 per cent of its spending on research and development. Put simply, this means that it recognises R&D spending as an asset rather than a cost.
Accounting for R&D costs in this way is entirely legal and for a company such as Aston Martin, one that relies on its pioneering automotive developments, it is also understandable. However, Quest reckons that on average the rest of the motor industry does it far less, capitalising about 40 per cent of annual R&D spending. Last year, Aston Martin spent £224.3 million on R&D, of which it recognised only £11.1 million as an expense. If the company conformed with the industry average, it could have had to recognise additional costs of close to £135 million. If these costs had been pushed through to the bottom line in full, then last year’s adjusted pre-tax profits of £207 million would have been reduced by more than half.
Deposits
Another potential concern is deposits. Aston Martin takes a deposit from its customers buying its high-end models, using the money, again entirely legitimately, to help to pay for its not inconsiderable capital expenditure, which it reckons will total £380 million this year.
This is some, though not all, of a line in the accounts called “trade and other payables”, a figure that increased by £80.3 million during the first half of the year. What this means in practice is that, in order for Aston Martin’s model to be sustainable and for it to offset the costs it will incur when its new models go into production, it will have to keep the future orders flowing in at a healthy pace.
Aston Martin argues that operating in this way is a strength rather than a weakness and avoids it taking on unnecessary debts. It also argues that because so many of its buyers come back and order again, it has a clear view of its sales patterns over the next five years and can be highly confident about its order book.
Verdict
Taken on their own, none of the issues raised here should be seen as a deal-breaker. Taken together, however, they do suggest that Aston Martin’s valuation is punchy. Also, Aston Martin plans to retain its cash to fund its growth plans, so there is no immediate prospect of a dividend, although the directors have said that they will review this as their strategy takes shape. Over the long term, Aston Martin may well justify its valuation. However, for the moment, steer clear.
Advice Avoid
Why Premium valuation for an ambitious business that is not without risks
