Aston Martin looks to join list of luxury goods winners with planned flotation

Russ Mould
29 August 2018

“Aston Martin’s rich history and the power of its brand – nowhere more evident than in the James Bond films – means that the car maker’s planned flotation on the London Stock Exchange is bound to attract a lot of attention, especially as a reported £5 billion valuation would put the firm on the fringes on the FTSE 100,” says Russ Mould, AJ Bell Investment Director.

“However, investing is not just about spotting a good story and investors will need to subject Aston Martin to the same rigorous checks that they would any other firm before the decide whether to buckle up and buy some stock or not. After all, the brand’s first appearance in the Bond films saw 007 drive his DB5 straight into a wall in Goldfinger’s Swiss factory while the spy’s DB10 ended up at the bottom of Rome River Tiber in the last film, Spectre, so accidents can and do happen.”

“When it comes to deciding whether to get involved or not, investors first must check three things when it comes to any IPO:

• Are the owners selling all, part of their stake or not at all? If they are selling out altogether you might want to wonder why and whether you should be buying. This does not look to be the case at Aston Martin, where the free float looks set to be relatively limited and Daimler will retain some of its shares.

• Is there a strong, long-term strategy for commercial growth that can be easily explained? The company today outlines its Second Century Plan and a three-pillar product strategy for the Aston Martin Lagonda with seven new models coming out between 2016 and 2022 and how these are designed to drive both unit volume growth and profit margin expansion.

• Will new capital be used for growth funding or simply to pay-off existing debt? The company only refers to a secondary sale of shares by existing holders rather than plans to raise new money, although management does outline its plans to keep debt to prudent levels (at or below 2.0 times EBITDA by the end of 2018).

“After that, investors need to make sure

• The company has a good management team who you can trust and which can point to a good track record and ideally owns a chunk of shares too, to align their interests with yours.

• The company has a sound business with a strong competitive position – in other words, why do customers want to buy its products and services from them rather than someone else (or at all). This is where the company’s brand, the quality of its product and the scarcity of its cars come into play, as all three can combine to provide pricing power, which is one of the key reasons that investors buy any luxury goods stock (and post-Crisis luxury goods floats such as Moncler, Samsonite and Ferrari have gone well, even if Prada has proved less successful). However, investors will need to consider the company’s chequered financial history and the technological shifts that are coming in the car market – such as the move toward electric vehicles and the necessary investment required – when they assess Aston Martin’s competitive position.

• The valuation is attractive. It is quite possible that the large syndicate of banks running the deal will look to price Aston Martin on a relative basis to Ferrari, which listed in New York in October 2015. It shares have surged from $52 to $130, enough to give it a $24.5 billion market capitalisation.

In 2017, Ferrari made a net profit of €537 million ($645 million) for a historic price/earnings (PE) ratio of 38 times. The US analysts’ consensus earnings per share figure for 2018 of $695 million equates to a forward PE of 35 times.

In 2017, Aston Martin made a net profit of £77 million, so its putative £5 billion market cap would put in on a historic price/earnings ratio of 65 times, a premium to Ferrari.

In terms of operating comparison:

• Ferrari sold 8,398 cars in 2017. Aston Martin expects to sell between 6,200 and 6,400 this year.
• Ferrari’s total sales in 2017 were €3.4 billion (£3 billion) Aston Martin’s were £876 million.
• Ferrari’s operating margin was 22.6% (operating profit of €775 million on sales of €3.4 billion), Aston Martin’s was 17% (operating profit of £149 million on sales of £876 million).

“Under such circumstances a premium price/earnings multiple relative to Ferrari looks hard to justify, pending further analysis of the balance sheet and cash flow, although Aston Martin does have some aggressive growth targets, with a medium-term plan to more than double volume output to 14,000 units and increase its operating margin to 20%.

“If investors feel these goals are credible then the deal could be successful, at least initially, although some may choose to be more sceptical, remembering the words of legendary US investor Benjamin Graham (the mentor of Warren Buffett, no less) from his book The Intelligent Investor:

‘An elementary requirement for the Intelligent Investor is an ability to resist the blandishments of salesmen offering new common stock issues during a bull market … Some of these issues may prove excellent buys - a few years later nobody wants them.’”

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