Aston Martin: Turnaround in play or an Accident waiting to happen?

Michael Smith

Kauri Asset Management

Less than two years after its high-profile listing, shares in Aston Martin have shed over 95% of their value. Has the brand lost its mojo, or will its corporate restructuring efforts mark the beginning of something special for the luxury car manufacturer?

A pedigree dating back more than 100 years

Formed in 1913, the British independent automotive manufacturer has become a cultural icon synonymous with luxury thanks to its distinguished reputation built over the last century.

With a presence in more than 50 countries, the brand has found an audience far beyond its British pedigree. In fact, in recent years, the company has also begun to diversify its focus from just sports cars and grand tourers to aircraft, submarines, boats, bikes and real estate development.

The company made its IPO on the London Stock Exchange in 2018 at £19 per share. The listing followed a financial turnaround where AML reported record sales and its first profit in seven years. However, it has since been plagued by issues including lacklustre demand for key models, oversupplied dealerships and mounting costs associated with ill-timed expansion efforts.

Compounding the company’s woes, significant debt has been hanging over the company. Net debt was £956 million at the end of March, with leverage at 16.2 times earnings. Amid all the issues, including the impact of COVID-19, Aston Martin was forced to tap the market earlier this year for £536 million as part of a major restructure.

Since then, its shares have continued to come under pressure, trading as low as 27.50p in mid-March. While the share price has since lifted to approximately 72p, there are still questions at play. This isn’t the first time Aston Martin has faced difficulties either, with the company declared bankrupt seven times throughout its history. However, there are hopeful signs of change.

Leadership transformation driving change

One of the major catalysts driving interest in Aston Martin over recent weeks has been the news of former CEO Andy Palmer’s exodus from the company after six years. Aston Martin confirmed that his replacement will be Tobias Moers, the current CEO of Mercedes' high-performance AMG subsidiary, who stands to deliver closer connections to Daimler.

Billionaire Lawrence Stroll, who not only owns Racing Point Formula 1, but tipped in to save the company, is executive chairman. Meanwhile, CFO Mark Wilson is leaving the business as well as various other non-executive directors. The sweeping changes signal a willingness on the company’s part to take the first step in addressing its long-standing issues. Moers has driven significant growth for AMG, catapulting the division into the spotlight and quadrupling sales.

Reset business strategy and refreshed car roll-out

As part of the leadership changes, Aston Martin will reset its business strategy. The revised focus of the business will centre on its status as a high-performance racing and luxury brand.

Struck by oversupply in its wholesale dealership channel, the company is working to restore balance in its supply chain in order to achieve higher average sale prices after they fell 34% to £98,000 in Q1. In the last quarter, management aggressively slashed the number of cars on forecourts by 428, double that achieved throughout 2019.

The company’s operations will also be reoriented and downsized, courtesy of the DBX, its inaugural SUV which is due this European summer, a delay of its Rapide E electric car and the Lagonda brand til 2025, and lower production of front-engine sports cars. More than 500 jobs will be cut to ‘rightsize’ its workforce, while an emphasis will be placed on developing mid-engine cars and a new V6 hybrid engine to broaden the brand’s appeal to a wider audience.

Aston Martin will also return to F1 racing in 2021 for the first time in 60 years in place of Stroll’s Racing Point F1 team. This ten-year deal provides a global marketing platform for the brand.

A luxury manufacturer leveraged to a reopening economy

With Aston Martin’s car sales slumping 45% in Q1 and leading to a 60% drop in revenue, quarterly losses ballooned to £118.9 million. However, despite COVID having a significant impact on Aston Martin’s sales network, its dealers will progressively come back online throughout 2020. All the while, direct demand from customers has remained resilient, especially before the pandemic, with pre-orders for the DBX faring better than any of the company’s previous models.

Aston Martin is more than just a car manufacturer, it is effectively a luxury brand leveraged to China’s growing middle class. China remains the company’s fastest-growing segment, and while the Q1 result in that market was dire, down 86% year-on-year, the country’s lockdown was effectively limited to that quarter. Total new car sales for all brands across China have risen 4.4% and 14.5% in April and May respectively, adding weight to the likelihood of a V-shaped economic recovery.

Looking ahead, Q2 results are expected to see further stress amid lockdowns in other regions, however, it is the second half of the year where a turnaround could be possible on the back of easing lockdowns, a gradual economic recovery and the launch of the DBX. The company’s order book looks far stronger heading into 2021 and if the DBX does well, it may even spur on the development of future variants, providing further appeal.

From here things boil down to execution, but the early signs of change give hope that this historic and sought-after brand could reverse its fortunes. 

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Managing Partner
Kauri Asset Management

With over 15 years of experience within the financial services industry, Mike possesses an outstanding acumen and extensive insight when it comes to global equity markets and a range of financial services products.

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