January 7, 2020 / 2:33 PM / 6 months ago

Breakingviews - Cash-crunched Aston Martin can only buy time

An Aston Martin DBS Superleggera Volante convertible sports car is displayed at the 33th Auto Zuerich Car Show in Zurich, Switzerland October 31, 2019.

LONDON (Reuters Breakingviews) - Aston Martin Lagonda increasingly resembles the ticking bomb in a James Bond movie. Shares in the 007 carmaker dropped on Tuesday morning after boss Andy Palmer announced another profit warning. Solid sales of a new SUV will be needed merely to meet mounting interest payments and avoid a balance sheet detonation.

In a trading update Palmer warned EBITDA for last year would be between 130 million and 140 million pounds – nearly half the previous year’s total. EBITDA margins, meanwhile, are predicted to reach a measly 13%. That compares with a forecast for 20% at the end of 2018 and 24% at rival automaker Ferrari.

Aston Martin’s equity value is now just $1.4 billion – some three-quarters below the company’s initial public offering in October 2018. That’s not far from net debt which is expected to climb to around $1.2 billion later this year once the company draws down an additional $100 million, lifting borrowing to over 7 times 2019 EBITDA.

The combination of falling sales and rising costs places the company’s near-term financial future in potential peril. One way to buy time is the all-important DBX, the carmaker’s first SUV, where Palmer has judiciously steered away from the company’s traditional associations with 007 wannabes to specifically target female drivers. Initial orders of 1,800 units since a November launch are promising. Even so, assume that the company shifts 5,000 of the vehicles at 150,000 pounds each. Applying a 15% margin would imply annualised EBITDA of 112 million pounds – barely more than an estimated 100 million pounds in interest costs Jefferies reckons Palmer could face this year.

Other rescue options include a possible sale to the Canadian racing-car magnate Lawrence Stroll or a rescue equity offering. But even if Palmer convinced battered shareholders to open their wallets to pay down expensive debt, he must also find a way to invest in new products – including a touted electric SUV under the Lagonda brand.

The fact that annual sales at rival luxury carmakers Rolls-Royce and Bentley rose 25% and 5%, respectively, last year only underscores Aston Martin’s predicament. The clock is ticking.


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