Where next for Aston Martin shares?

Hopes were high when Aston Martin went public in October 2018. Investors were wooed by the opportunity to invest in one of the most luxurious names in British business and the first UK carmaker to list in London since the 1980s.

It was starting to reap the rewards of a turnaround plan by reporting record sales and its first profit for seven years, with a view that the trend would continue.

Sales were on the up, it was back in the black, aiming to double production in just four years and readying new lines of cars that would take the fight to Ferrari – the Italian carmaker that has seen its valuation increase more than three-fold since it went public in New York in 2015.

The hype led to Aston Martin listing at an initial public offering (IPO) price of £19 per share and with a valuation of £4.3 billion.

Read more: Everything you need to know about the Aston Martin IPO

Aston Martin: a rough ride for investors

But it has been anything but a smooth ride since then. Today, shares trade at just 56p each and the carmaker is worth just £850 million after being hit by several problems that started to mount in 2019.

One of the biggest was an issue with oversupply. Many of Aston Martin’s cars were being supplied to dealerships rather than being shipped directly to paying customers, and an imbalance meant its stock wasn’t shifting and was now oversupplied. Furthermore, overall demand in key markets of the UK and Europe, particularly for the Vantage, wasn’t as good as expected.

The oversupply meant it had to take action to shift them, which led to an uptick in leasing rather than buying, and ultimately put pressure on its selling price which had already suffered as the company’s core products shifted to the Vantage.

Aston Martin’s business, as one catering for the super wealthy, is not about volumes but pricing power and how well older cars retain their value, which in turn are both seen as indicators of brand perception. These problems came at a time when Aston Martin’s costs and level of investment were increasing as it built a new plant in Wales to make its first-ever sports utility vehicle (SUV) and electric car.

It didn’t take long for Aston Martin’s fortunes to collapse. Sales are in decline and its accounts are once again awash in red ink. It has stunned the market twice with profit warnings and has had to raise large amounts of both debt and equity despite the fact it listed less than two years ago.

All of its problems have been exacerbated by the coronavirus, which has exposed the carmaker’s severe issues with debt. Net debt stood at over £956 million at the end of March, having soared from just £560m at the end of 2018. That meant its leverage versus long-term adjusted earnings had soared; from a reasonable 2.3 times, to a staggering 16.2 times.

Will Lawrence Stroll be the saviour of Aston Martin?

Aston Martin was forced to take action and began looking at pricey debt packages to prop the business up – until it finally found a saviour in the form of Canadian Formula One (F1) billionaire Lawrence Stroll.

Stroll is known for backing luxury brands such as Tommy Hilfiger and Polo Ralph Lauren, and oversaw the IPO of Michael Kors, but he is also known in the automotive space. He once had interests in Ferrari dealerships and is also involved in F1 with a stake in Racing Point F1, and he has links to several other carmakers.

Stroll led a consortium of investors that managed to gain the support of both the board and shareholders, successfully fending off a rival offer from Chinese carmaker Geely.

While Geely, which owns Britain’s Lotus and Sweden’s Volvo, as well as a stake in Daimler, was hoping to fold Aston Martin into its growing list of brands, Aston Martin opted for Stroll’s offer that is set to make Aston Martin a more sustainable business - having been bankrupt seven times during its history.

Stroll takes advantage of Aston Martin’s vulnerability

Originally, Stroll and his consortium offered to pay £4 per share to take a 16.7% stake and provide Aston Martin with £182 million, as well as short-term working capital, under the condition that Aston Martin conducted a rights issue to raise another £318 million from existing shareholders, including Italian outfit Investindustrial and the Kuwait Investment Fund, its two largest investors.

However, after revealing a ‘very difficult year’ in 2019 saw its sales fall and its pretax loss widen, and Stroll admitting the carmaker needed some serious attention, Aston Martin shares began to tumble further – far enough that Aston Martin was forced to tear up the original terms and allow Stroll to get significantly better terms.

Stroll and his consortium ultimately put in less money for a larger stake, and existing investors had to contribute more. The group ended up paying £171 million for a 25% stake in the business, at just £2.25 per share. Meanwhile, the rights issue ended up raising £365 million.

Does Aston Martin have enough money?

Although the deal was widely supported by investors - with 99% voting in favour of the plan and just 2% not taking up their rights – questions were still being asked whether the injection was large enough. Net debt was immediately brought down to around £614 million after the investment but leverage still stood at ten times adjusted long-term earnings.

Leverage is a ratio between earnings and debt, so Aston Martin needed to not only bring debt down but improve its performance. But that has become much harder as the coronavirus takes its toll, impacting both demand and production.

Aston Martin reported a 60% dive in revenue in the first quarter (Q1) of 2020, posted a £120 million loss, and withdrew its guidance for the year as it was forced to shut its factories and the coronavirus hit demand, particularly in its fastest-growing segment of China.

The fact Aston Martin warned it didn’t have enough funds to survive the next 12 months so quickly after securing the investment from Stroll and others, having secured a new $100 million credit line, is evidence not only that the package wasn’t big enough but also the severe impact the coronavirus is having on the business.

It also highlights what a huge mistake it was for Aston Martin to decide not to raise any money when it listed and only allow existing investors to cash-in.

Where next for Aston Martin?

Aston Martin now has new investors, a new board and a new strategy – all of which it hopes can reinstall confidence in the stock.

Stroll takes driving seat at Aston Martin

Stroll has wasted no time in making his mark on the company. He has become executive chairman after replacing Penny Hughes, who oversaw the IPO. Since then, the chief financial officer (CFO) Mark Wilson has gone, a slew of non-execs have resigned and are to be replaced, and chief executive officer (CEO) Andy Palmer has also been replaced by Tobias Moers, who runs the AMG performance arm of Mercedes-Benz.

Moers will join at the start of August, so until then, Keith Stanton - who was heading up manufacturing - is taking charge as interim chief operating officer (COO).

Although many of the old board, especially Palmer, had been credited with turning Aston Martin around before listing the carmaker, all of their hard work was overshadowed by its poor performance during life as a public business. For Stroll, it was clearly inconceivable to justify management that had overseen a company with a share price that listed at £19 per share and was valued as low as 30p within just 18 months.

The change in management, particularly the appointment of Moers, has raised hopes that they can make a difference. During his tenure at AMG, he managed to propel the unit to the forefront of Mercedes Benz by raising its profile and quadrupling sales.

Aston Martin to scale down ambitions and focus on core strengths

Stroll and his new team intend to ‘reset’ the business with the aim of making it ‘one of the pre-eminent luxury car brands in the world'. However, the new chairman told the Financial Times that this would involve taking ‘one step back before taking five steps forwards’.

The ‘immediate priority’ is to address the imbalance between supply and demand in its wholesale segment supplying dealerships. This will allow it to return to higher selling prices after being hit by the oversupply. The average selling price in the Q1 was just £98,000 – a third less than the £149,000 posted a year earlier.

Palmer and the old board were already aware of this problem and were taking action, but Stroll and the new team have been far more aggressive with their approach. It reduced the number of cars on forecourts by 428 in the latest quarter, which was double the number it took out in the entirety of 2019. Still, it has warned that wholesale sales will continue to be ‘materially lower’ in 2020 as it continues to address the imbalance.

The new board have also decided to delay the launch of Aston Martin’s electric car, the Rapide E, which was supposed to start shipping to customers this year.

Despite being close to being completed, the firm doesn’t intend to launch the new model until 2025 to ease the company’s finances, and has also pushed back the relaunch of the Lagonda brand until at least 2025 from the original goal of 2022.

This will free up funds to invest in a new UK-built, V6 hybrid engine and a string of new mid-engined cars, led by the Valhalla and Vanquish, that can take the fight to Ferrari, with a view of launching the former in 2022 with the latter to then follow. Aston Martin’s mid-engined cars, based on the Valkyrie, have been described as ‘crucial’ for the company’s revival.

It will also see Aston Martin return to racing for the first time in 60 years. Stroll’s Racing Point F1 team will become the Aston Martin Works F1 team under a ten-year deal that will start in 2021. ‘This will give us a significant global marketing platform to strengthen our brand and engage with our customers and partners across the world,’ Aston Martin said.

Ties with other carmakers will also be solidified. German outfit Daimler, the owner of Mercedes-Benz, already supplies engines to both Aston Martin and Racing Point, and will therefore see its relationship go to a new level, especially following the appointment of Moers as CEO.

All eyes are on the DBX in the short term

The new bosses at Aston Martin have tweaked the carmaker’s ambitions over the mid to long term, but its success over the immediate future still lies on its first ever SUV, the DBX.

The newest model has fuelled its financial problems as it had to build a new plant in Wales to make them at a time when costs were rising and spending needed to be reigned in. This is one of the reasons why Aston Martin has had to raise such significant amounts of debt and equity over the last 18 months.

But, it is what Aston Martin is pinning all of its hopes on. A successful launch is the ‘most pressing objective’ in 2020 as the new type of car will widen the company’s appeal, particularly in fast-growing areas like China, and revive the unimpressive sales Aston Martin has achieved of late.

Despite the coronavirus having temporarily stopped work at the new production plant, things are back up and running and Aston Martin remains on schedule to start delivering the first DBX’s before the end of June.

The release of the new car will mean Aston Martin should find it easier to reset the business. For example, it will only produce DBX’s that have been ordered to ensure demand follows supply to avoid suffering the same problem with dealerships again, which should put it more in-line with other luxury carmakers.

It is important to note that demand for Aston Martin cars directly from customers has remained strong, just not enough to offset the severe decline in wholesale. Retail sales – as in those made from direct orders – were seeing double-digit growth before collapsing as a result of the coronavirus this year.

Plus, demand for the DBX has been ‘better than for any previous models’. It began taking orders in November, and so far it has secured over 2000 orders – the majority of which are directly from customers rather than through dealerships.

That means its order book is already stretching into 2021, giving it a firmer and more certain outlook to deal with. If the DBX proves to be as a success as hoped then Aston Martin intends to build upon it by releasing new derivative forms from 2021.

Having been let down so badly, investors will be keeping an eye on delivery and execution of the DBX and its other new models over the coming years. The DBX has to succeed if the carmaker wants to achieve its others goals and although demand looks solid, the uncertain economic picture going forward will cause concerns.

Where next for Aston Martin shares?

The rights issue sent Aston Martin shares to new lows and although they have found higher ground since then, they still remain historically low. Although new investors, a new board and a new strategy has gone some way in reinstalling confidence in shareholders they will be waiting for results before getting carried away.

The next set of results will cover Q2 2020, which Aston Martin has already warned will be ‘very painful’ as the brunt of the coronavirus impact will be felt. Fortunately, demand in China has started to return and Aston Martin will be hoping more economies will reopen in time to embrace the launch of the DBX.

Earnings were already set to be second-half weighted because of the DBX as well as its new special models, and it will be hoping coronavirus won’t be causing as much havoc by then.

Investors are not expecting a quick fix – because there isn’t one. Although Stroll and his new team have a proven track record they will have to demonstrate their ability to deliver, particularly on the DBX, before they are rewarded. The Q2 results are likely to be dire, but investors will pay more attention to the progress of the DBX and its financial position than anything else.

If everything goes to plan then the second half of 2020 should be the start of a turnaround, with the launch of the DBX underpinning its plans to rival Ferrari, launch into F1 and regain its prestige in the market.

Brokers will also be key in setting the expectations for Aston Martin shares going forward. The substantial changes to the business and the resetting of its share price following the rights issue means most broker’s current view on the company and its prospects are out of date, particularly their target prices.

According to London South East, only one broker has updated their view on Aston Martin since the changes, with Deutsche Bank restarting coverage on the stock with a 45p price target on 27 April.

Investors should expect more brokers to restart their coverage of Aston Martin and these will go a long way to setting the expected price range of shares over the coming months. In terms of clients here at IG, all of them are long on the stock as of 2 June and are expecting the stock to rise in price.

You can read more about how to buy, sell and short Aston Martin shares here.

What about Ferrari shares?

Aston Martin is continuing to try and emulate the success of Ferrari, but is the Italian carmaker a better investment? Ferrari shares plunged along with the rest of the market as coronavirus took its toll, but they have managed to recover the majority of losses since then.

Ferrari’s Q1 results saw revenues and profits fall year-on-year and it warned Q2 would be worst, noting the impact the virus is having not only on demand but also on its F1 outfit. But the long-term outlook for the company, excluding the virus, remains fundamentally stronger than Aston Martin and the fact it has continued to pay dividends and buy back shares this year is a testament to that.

Brokers currently have an average hold rating on Ferrari shares with a target price of €148.17.