Saudi Fuelled Injection

A £654m equity capital raise was completed in the back half of 2022, which saw the Saudi Arabia’s sovereign wealth fund PIF, become a new anchor shareholder. The group said at the time that up to half of the proceeds would be earmarked for debt reduction, yet only a $200m tender offer followed.

“This tender is the first stage of that debt reduction.” a spokesperson clarified, ”we expect to understand more about our bondholders’ appetite/intentions by the end of the tender period and various options for debt reduction remain open to us.”

As we expected, a larger portion ($143.8m) of the 2nd-lien PIK notes were taken out, with the remaining $40m used to tender the 10.50% SSNs due 2025 (clients can read this report here). It made greater sense to tender more of the 2L due the principal appreciation being dilutive for equity — likely something the PIF would also want to avoid.

Alongside deleveraging, the group should also benefit from interest savings, which we estimate to be $17.1m or £14.2m at today’s exchange rate. Around £169m of the 2L (8.89% cash / 6.11% PIK interest) and £935m of the 10.50% SSNs remain outstanding as of 31 Jan 22.

According to the latest presentation, net debt ended the period at £765.5m after a huge £156m currency revaluation of the group’s USD denominated debt was accounted for. Year-end net leverage dropped 2.1x to 4x as the equity injected boosted cash levels.

Cash Flow Roadblocks

Strong demand across the portfolio, alongside record average selling prices (ASP), were the main drivers of top-line growth. It’s important to note, however, that the 24% YoY increase in ASP is likely to be swayed by favourable FX swings as a result of a weaker pound. Management did not mention the extent of the FX contribution in their pre-recorded earnings presentation or Q&A session.

Ironically, despite being an iconic British brand, Aston Martin is a net beneficiary of GBP weakness versus the USD. Dollar denominated revenue, which accounted for 29% of FY 22 revenue, also provides natural hedges to the group’s coupon payments. 

Aston Martin expects ASP will continue to rise with the introduction of a new range of cars, which will all have minimum contribution margins of 40%. High margin Specials, including the 110th anniversary special and “ultra-luxury” DBR22 model, should also support their margin strategy in FY 23 and beyond. The new model range is set to be unveiled at the group’s Capital Markets Day later in the year, and will benefit financial performance from Q3 onwards.

Despite bullish signals for the back-end of 2023, management expects free cash outflow in H1 23 to be at similar levels to H1 22 (£234m). This can partly be explained by some spill-over of Capex spend from FY 22 as management re-phased spending. Guided Capex and R&D of c.£370m is expected next year. 

Management explained the increase in expected capex is a result of higher YoY inflation, incremental investment in the 110th anniversary model and increased investments in electrification. 

The group expects 2023 to be the peak year of capex, with spend readjusted down after this point in order to deliver on the target of becoming sustainably free cash flow positive from 2024.

Road to profitability

In Lawrence Stroll’s statement released today, the executive chairman detailed how the group navigated a challenging environment in 2022, but things look brighter in 2023. 

The pickup in volume and contribution margin growth is expected to deliver an adjusted EBITDA margin up to c.20% in 2023 and c.25% by 2024/25. This would translate to £500m Adj. EBITDA using the medium-term revenue guidance which was first outlined in mid-2020 after a consortium led by Yew Tree took over Aston Martin.