Shares in Aston Martin (LSE: AML) rallied to over 600p in December when gossip of a racing team owner taking a significant stake was flying around. It was just a rumour, however, and the share price retreated. Investors perhaps hoped that it would be lifted again by the full-year 2019 trading statement.
Aston released the trading statement on 7 January, 2019, and shares are down, trading at 408p.
Who got an Aston for Christmas?
The update spoke of lower sales, higher selling costs, and lower margins continuing through December, the company’s peak selling month. Over the year, 5,809 cars were sold, but that’s 602 less than in 2018.
Net debt has increased from £732m halfway through the year to something like £880m at the end. That will rise as the company draws down on a £100m facility that was unlocked by exceeding a target.
The company is talking to investors about further funding, and surely this has to be equity as debt levels are eyewatering, which means existing shareholders get diluted.
That target that Aston exceeded, was to receive 1,400 orders for its new DBX model. It received 1,800 orders, and that was the only positive thing in the year-end update.
Aston had to reissue the update because it contained a mistake.
DBX appeal
Debt is not pure evil. Issuing debt is fine if it lowers a firm’s cost of capital, and if the cash raised buys assets that will return more than what it cost to fund their purchase.
Aston spent £300m on capital and R&D expenses in 2019. A good deal of the spending was on the St Athan factory, which will build the new DBX model. A lot is riding on the success of this model; hence, the 1,800 orders is positive and represents the most robust demand for a new Aston model.
DBX production is on track to start in the second quarter of this year, and Aston wants to manufacture 5,000 of them per annum eventually. It also wants to make 9,000 of its other models for 14,000 cars per year total.
Investing in more capacity should be a good thing if you can produce at that capacity, and sell the vehicles. Taking a look at that 1,800 orders for the DBX reveals that only 1,200 are for specific customers. The remainder has to be from Aston’s wholesale dealers without a customer asking for one.
The trading update makes mention of reversing a trend in dealer inventories. The last half-year report showed a substantial jump in the value of vehicle invoices issued to dealers but not yet paid. Inventories also increased.
Aston forecasted sales of 6,300 to 6,500 vehicles for 2019 and probably produced and stocked dealers for this. They have probably slowed down a bit towards the end of the year. Dealer inventories are being reduced now, but are probably still stuffed full of unsold cars.
Broken down
Even if the DBX starts production and demand continues, how many can Aston get out to customers if their channels are full? The production, inventory, and distribution of vehicles need to be financed before cash is received. Aston is making less in operating cash than the interest payments on its debt.
I think current shareholders’ only hope at this point is a takeover offer at a premium to the current share price. I would avoid this stock and look for something roadworthy.
