Aston Martin May Have To Borrow To Fund Crucial DBX Luxury SUV

Aston Martin shareholders have discovered the hard way that the company is not a virtual license to print money like its rival Ferrari, but some investors still retain the hope that, long-term, the storied luxury sports car maker can start to make serious profits.

Aston Martin shares have lost about 2/3rds of their value since October’s initial public offering (IPO), and last week warned it had slashed its profit forecast to an operating margin of 8% for 2019, down from its previous target of 13%. The company also cut its production forecast for 2019 to between 6,200 and 6,500 vehicles from 7,100. Aston Martin CEO Andy Palmer cited overall weakness in the global auto market for the company’s problems.

“We anticipate that this softness will continue for the remainder of the year and are planning prudently for 2020,” Palmer said.

Commentary from some analysts has been scathing.

Investors looking for a bailout from a rich predator can dream on, according to Reuters Breaking Views column.

“Barring the vanity of a flush millionaire, or overeager Chinese player, Aston looks destined to continue skidding on its own,” said Breaking Views columnist Lisa Jucca.

“The gloomier outlook comes after a litany of disappointing earnings releases, question marks over the group’s accounting practices and a thwarted attempt to award managers an outsized pay package. The shares trade almost 60% below their October initial public offering price. Aston blamed difficult economic conditions in Europe and Britain for its current woes, which somehow its arch-rival Ferrari has managed to sidestep,” Jucca said.

A crucial milestone for the company will be the launch of its SUV, the DBX, early next year. This will have to be some vehicle to compete in the high end of the SUV market which already includes the Bentley Bentayga, Rolls Royce Cullinan, Lamborghini Urus, and soon the Ferrari Purosangue. There is plenty of competition too from upstart “cheap” pretenders like the Range Rover Overfinch, Maserati Levante and high end versions of the Audi Q8, and Porsche Cayenne.

The Financial Times Lex column sees big obstacles to the DBX’s success.

“To fulfil promises the group made at the time of the IPO, wealthy Chinese motorists would have to buy plenty of the top-end jalopies – and this at a time when a trade war has damaged confidence,” Lex said.

Lex worries that Aston Martin may not have enough cash to fund the DBX project, and may have to borrow to finance it.

But Aston Martin isn’t without supporters.

Bernstein Research analyst Max Warburton, in a report wondering if the company needs a capital rise and questioning its viability, said Aston Martin does have a long-term future.   

“Does this warning push Aston over the edge? The company has a very weak balance sheet. It should have raised new funding with the IPO, as we wrote at the time. But we do not believe last week’s news pushes Aston over the edge,” Warburton said in a report published Monday which rates the company “outperform”.

“We expect it to report gross cash of (about) 200 million pounds ($250 million) this week, with Q2 results. That’s almost 20% of revenues – a similar buffer to many big (manufacturers),” Warburton said.

Aston Martin is scheduled to report its 2^nd quarter financial report Wednesday.

“Aston’s situation is very uncomfortable for sure, but not yet critical. But it now absolutely has to get the DBX launched on time. There is no room for error,” he said.

Investment researcher Jefferies, which rates the company a “hold”, expects the financial report Wednesday to determine if Aston Martin does need a fresh capital injection.

Jefferies is more hopeful about the possibility of a takeover.

“We have no particular insight into the matter and can only assume that Aston Martin and its brands could generate interest from corporate investors with interests in the automotive and/or luxury industries, or from private equity. This could lead to materially different outcomes for existing public shareholders,” Jefferies analyst Philippe Houchois said.

Private equity firm Investindustrial owns 34% of Aston Martin, while Mercedes-Benz parent Daimler has a 4% stake. Mercedes makes some Aston Martin engines.

Aston Martin shares were quoted at 6.00 sterling in late Monday morning trading in Europe, down 0.7% on the day. The shares were floated at 19 sterling last October.