Aston Martin remains shaken but not stirred more than a year on from its initial public offering (IPO), the aftermath of which has fallen far short of the company’s expectations. The company has launched DBX, its new luxury SUV, which has a lot more riding on it than the family of five for which it was designed. The SUV is touted as the company’s ticket out of protracted financial trouble.
In October last year, a quarter of the company was floated at £19 per share, valuing the company at well over £4 billion. While the initial performance was slightly poorer than expected, the share price had fallen to £11 by the end of last year, and has continued its turbulent decline since. At last night’s close, the company traded at 442p. The decline might surprise many, although the ardent observer might have predicted the company’s woes even before it was floated last year.
Aston Martin has always been a high-risk proposition, given its restrictive target audience of high net-worth individuals (HNWI). By its own characterization in its prospectus: “Aston Martin Lagonda’s cars sit solely within the high luxury sports ("HLS") car market.”
The HNWI market in developed economies is subject to saturation, particularly in light of considerable competition for the luxury car space. Aston Martin’s reaction to this scenario has been expansion into Asian markets, home to burgeoning HNWI segments. The considerable expenditure required to drive expansion and cope with high risk has been among the factors putting financial strain on the company recently.
Signs of big spending are most strikingly exemplified by the company’s debt levels, which stood in excess of £800 million at the end of the last quarter – Q3 2019 – while capital expenditure at the company stood at £255 million at the same time. On the other hand, Aston Martin’s cost of sales – which include raw materials & components, labour and overheads – has been registering marginal declines over the last two years, having been on the rise previously.
Nevertheless, since the 2018 flotation, the high spending and debt has manifested itself in a number of ways, sending the company’s value plummeting each time. In February 2019, Aston Martin reported that the cumulative cost of its IPO was $136 million, which is more than double the company’s operating profit for the first half of 2018. At the time, The Guardian reported a fall of almost 20 per cent in the company’s share price.
Perhaps the most devastating blow came in late July this year, shortly before the company’s half-yearly results. Aston Martin issued a profit warning to its investors, which scaled back its production and sales targets for the full year. The revision was attributed to poor economic conditions in the United Kingdom and the European Union, described by the company as its two key markets.
Poor performance in these markets is likely a product of the protracted Brexit saga. Speaking to Forbes recently, Automotive Editor at GlobalData David Leggett illustrated how the automotive sector is among those worst hit by Brexit uncertainty, primarily due to the prospect of rising production and trade costs between the UK and the EU.
For Aston Martin, this uncertainty has been nearly devastating. The July trading statement sent its share price plummeting to around £6 per share, which had further fallen below £5 per share by the start of August. In September, the company responded with a bond issue of £120 million pounds to maintain liquidity. The 12% interest rate on the bond reflects the trust deficit from which the company is currently suffering.
CEO at Aston Martin Andy Palmer is quoted in the Financial Times indicating that the bond is a way of ensuring enough liquidity to support the DBX launch, which is expected to bring some financial respite. Selling the DBX is not only crucial to rescuing revenues at Aston Martin, but is a central outcome for the company’s future liquidity prospects. The company must sell at least 1,400 DBXs by June next year in order to secure another bond issue of nearly £80 million. If these targets are not met, borrowing for Aston Martin is likely to be a remarkable challenge, given the already soaring interest rates with which they are faced.