A look at the Aston Martin IPO

Looking under the bonnet

Given the brand’s iconic and prestigious status, an investment in Aston Martin might seem appealing, and while there is a lot to like it is important to look under the bonnet. Despite producing highly desirable luxury cars, the company has a long history of financial trouble and has been bankrupt seven times since its incorporation in 1913. However, since 2014 under the leadership of CEO and ex-Nissan executive Andy Palmer, the company has swiftly returned to profit for the first time since 2010 and has emerged the fastest-growing automotive brand of 2018 and fastest-growing UK brand according to valuation consultancy firm Brand Finance. 

Before Andy Palmer took the driver’s seat in 2014, vehicle sales had slumped after years of underinvestment in new models and technology to keep pace with the rest of the luxury car market. In 2015 Aston Martin announced its “Second Century Plan” focused on stabilising the business, strengthening its core product portfolio, and expanding the product line with the aim of creating “the most beautiful and accomplished automotive art in the world”. 

The Second Century Plan is successfully underway with the planned launch of seven new core models, one launched each year from 2016 through to 2022 with each model having a seven-year lifecycle (7x7x7). The first stage of this plan has been completed successfully with the launch of the first new core model DB11 in late 2016 which lifted sales by more than 80% last year and has helped strengthen the base upon which the new business will be built. The second core model launched under the Second century Plan is the new Vantage, released in Q4 2017. 

The second stage has also commenced with the marketing launch of the DBS Superleggera in June this year and the planned convertible Vantage and DBS Superleggera models. As part of the Second Century Plan, each of the new core models will contribute to a three-pronged product strategy including: (i) GT, sports and mid-engine cars, (ii) SUVs ,and (iii) sedans. 

The third phase of the turnaround involving the expansion of the product portfolio will begin with the launch of Aston Martin’s first SUV, the DBX, in 2019. This phase will continue with the launch of a fully electric, ultra-luxury SUV and sedan under the Lagonda brand in 2021 and 2022 respectively. 

The turnaround plan is ambitious and will see Aston Martin as the first luxury automotive manufacturer to offer a product within each segment of the luxury car market, from grand tourer to hypercar. 

Since the launch of the new models through the Second Century Plan, Aston Martin has delivered successfully on revenue growth and accelerating sales volumes. In 2017, 59% of customers were new to Aston Martin with the strong brand and improved product offering attracting new customers.

The turnaround strategy has renewed confidence in Aston Martin, not only as a prestigious heritage brand with beautiful cars but as a profitable manufacturer of high-end luxury vehicles. 

At first glance, the turnaround plan seems to have been successful in driving Aston Martin to turn its first profit since 2010 in 2017. Revenue grew nearly 48% from £593m in 2016 to £876m in 2017 due to the well-received D11 and Vantage models generating significant sales growth. 

However, Aston Martin’s R&D capitalisation rate is well above peers and it is worth noting that under US Generally Accepted Accounting Principles (GAAP) accounting standards, Aston Martin would have reported another full-year loss for 2017. That year, Aston Martin spent £224mn on R&D, but only £11mn was expensed on the income statement; the remaining 95% was capitalised on the balance sheet. 

Aston Martin certainly isn’t the only company to treat R&D expenses as an asset and many argue that without capitalising R&D, earnings are understated as the calculation of Net Income does not identify the company’s material investments in R&D as part of its operating investments. Regardless of opinion on accounting treatment, Aston Martin’s R&D capitalisation is significantly higher than other automakers. 

Growth outlook

Aston Martin builds its growth case on the expanding population of high net-worth individuals, or HWNI, and their desire to own high-end luxury vehicles. Capgemini’s 2017 World Wealth Report estimates that the population of HNWIs has grown at a compound annual growth rate (CAGR) of 7% between 2010 and 2016, whereas the global population expands at an estimated annual rate of 1.1%.

According to Camgemini’s report. the growth of HNWIs will continue to increase and Aston Martin relies on this expansion to underpin its growth plans. 

According to Bain & Company’s Luxury Goods Worldwide Market Study, growth in the personal luxury goods market has significantly exceeded global GDP growth, with the luxury cars segment being the fastest-growing segment of the luxury goods market. The most exclusive end of the market, “absolute luxury cars”, has seen the fastest growth rate.

As the population of HNWI expands, Aston Martin believes three key drivers of growth in the luxury car market are: the increase in high net-worth women corresponding to higher household income, the increase in young HNWI, and the propensity within modern society to resist ageing, supporting demand in the higher age bracket for luxury sportscars and thus creating a larger market for the Aston Martin Lagonda brand. 

Assuming the IPO prices at the midpoint of the marketed range £20.00, valuing the company at £4.5bn, based on 2018 expected earnings the company would trade at 22x EBITDA for 2017, a 29% premium above Ferrari, which trades on an EV/EBITDA multiple of 17x. This seems unrealistic given the loss-making track record and debt-laden balance sheet, and stands in stark contrast to Ferrari where margins and cash flow generation are stronger.

Since listing in 2015, Ferrari has garnered this premium valuation multiple on an EV/EBITDA multiple of 12.2x by successfully executing its five-year strategy to double EBITDA and beating market expectations quarter after quarter; that has seen the stock rally 170% since listing. 

While Aston Martin’s Second Century Plan is off to a good start, the IPO valuation requires management to perfectly execute the remainder of the strategy for Aston Martin to deserve the premium valuation multiple. Given the high level of R&D capitalisation, the DBX SUV launch in 2019 will need to be immaculate in order fill the deficit once earnings are normalised for R&D. 

Luxury SUVs in particular are a rapidly growing segment of the luxury car market and extrapolating the success of the Porsche SUVs, this could be possible, especially given that Ferrari has delayed the launch of its first SUV to 2020, but again the onus is on management to continue to deliver. 

Based on the fundamentals, while a £4.5bn valuation might seem unachievable, the Aston Martin IPO is a unique luxury proposition as the opportunity to gain exposure to one of the last remaining all-British car brands is certainly rare. Valuation might go out the window when investors consider the marque’s appeal… even if remains in their portfolio and not their driveway.