Aston Martin’s Mercedes Deal & Q3 2020 Results

Aston Martin announced its Q3 2020 results this week.  The release was pulled forward by 10 days to coincide with an announcement of a new strategic technology agreement with Mercedes-Benz and new financing.  Management also started to articulate Aston Martin’s 2025 goals and strategy.  Needless to say, there is a lot to unpack here.  We basically have hope for the future, the financial reality of today, and the hangover from a tawdry past.

 

Starting with the hope for the future, Lawrence Stroll, the Executive Chairman, announced a 2024/25 target of £2 billion in revenue and £500 million in EBITDA.  As reference, Aston Martin’s best year historically was 2018 when it delivered £1.1 billion in revenue and £247 million of EBITDA.  Achieving these goals very much depends on the new strategic technology agreement with Mercedes-Benz.  Simplistically, Aston Martin gets the right to buy powertrains, software, and components from Mercedes-Benz through to 2027.  This will allow Aston to quickly facelift the current line of uncompetitive front engine cars and saves Aston the enormous, unaffordable, costs of developing these technologies in house.  In return, Mercedes Benz gets a 20% shareholding in Aston Martin and two board seats.  At Aston Martin’s current market cap, this 20% is worth £200 million.  However, Aston Martin has promised Mercedes Benz a minimum share price of 62p (vs. today’s 51p) which would imply that Aston would need to make an additional cash payment to Mercedes of roughly £40 million if the share price does not rise above 62p in the next several years.  This is a no-lose deal for Mercedes with a billion £ upside if Aston is able to recover and deliver the ambitious goals Lawrence Stroll set for 2025.  Assuming Aston hits the goals Stroll has laid out, and the market gives Aston even just 50% of Ferrari’s Price/EBITDA ratio, that would give Aston a market cap of £9 billion and Mercedes 20% being worth £1.8 billion.  While this seems like a very steep price to pay for the right to buy parts, the reality is Aston’s negotiation position was only slightly better than Richard III’s at the end of the Battle of Bosworth.  Aston badly needs the technology to survive and does not have the financial resources, or internal capabilities, to develop it themselves.   In addition, the number of companies Aston could realistically turn to for this type of deal consisted of a list of one.  Even more interesting will be to see what happens when the current deal expires in 2027. 

Moving on to the financial reality of Aston today, this has basically been addressed by kicking the can down the road until 2025/2026 through a £1.3 billion debt and equity package (£125 million via new share placement, £840 of 1st lien notes and £260 million of 2nd lien notes).  These funds will be used to retire the current debt coming due in 2022 and provide an additional £200 million of liquidity.  This funding is not coming cheap, the £260 million of second lien notes carry a 13.5% coupon which puts them firmly in the “junk” category.  This also represents yet another increase in the number of issued shares.  In January 2020 the number of shares was 228 million and by the end of the year the number will have increased 9X to 1.824 billion.  The initial shareholders haven’t just been diluted, they have been drowned, which does sum up Aston’s last two years.

Which brings us to the hangover from a tawdry past and Aston’s Q3 results.  There are still ugly but a bit less ugly than Q1 and Q2.  On a quarter to quarter basis, revenue more than doubled to £124 million and the EBITDA loss dropped by just under half to £28.6 million.  Revenue and car units sold are now at 40% of 2019 YTD.  Looking at a few areas of interest in a bit more detail:

 

  • Current range: Tobais Moers, the new CEO, indicated in the earning call that dealer destocking was ahead of plan and should be finished by Feb 2021. This might be wishful thinking if they are expecting summer sales trends to continue into the winter with a second wave of Covid-19 now hitting many of Aston’s key markets on top of a usual seasonal downturn in supercar sales.  In addition, Stroll implied that he expected the current range facelift/relaunch to begin within 12 months which Moers confirmed when he commented that he expected the new Mercedes tech to start showing up in Aston Martin’s in Q 3 2021.  This is quite an ambitious timeline and underscores the depths of the problems with the current range.  It was also interesting to note that the chief architect of the current range, Marek Reichman who played a leading role on the Q2 analysts call, was nowhere to be found this time.
  • DBX SUV: The comments on the DBX in both the earning call and in the presentation are brilliantly opaque. Other than repeating multiple times that 345 DBXs have been sold to dealers, there are zero details on the size of the order book.  Stroll’s comments on the order book were “we are sold” and “we have orders sold out through the first quarter of 2021”.  If there was one single number that if I was an investor I would have wanted to hear, it’s the size of the DBX order book. In the Q1 earning’s call an Aston Martin executive stated that the DBX order book exceeded 2,000 units.  Question is where does it stand now?  Good news normally gets shared, loudly and often.  The silence on the order book is becoming deafening.  The recent cut in prices also isn’t something you do when orders are blowing away expectations.  They are more a sign that Stroll’s statement on the “very successful launch of the famous DBX” isn’t quite as successful as claimed.
  • Valkyrie, Valhalla, and Vanquish mid-engine cars: The Valkyrie’s quest to become the most delayed supercar in history maybe finally coming to an end. Stroll stated that deliveries are now expected to start in June 2021. If so, Valkyrie depositors should finally be able to retire the five year interest free £500,000 loans they have been extending to Aston Martin.  With all the changes in leadership and split with Red Bull, I will be very interested to see what Aston finally delivers on the Valkyrie vs. what was originally promised.  The Valhalla and Vanquish were also mentioned by Stroll, with the former now slated for 2023 and the later following in 2024.  Given the massive delays on the Valkyrie and enormous challenges Aston Martin still has, I would be shocked if we see the Valhalla before 2024, if at all.  I can see a stronger case for cancelling the Valhalla (as many of the original depositors have cancelled their orders) and focusing Aston’s scarce resources on getting the mid-engine Vanquish right.
  • Capacity: In Aston Martin’s most successful year in history, they sold 6,441 cars. It came out in the earnings call that Aston Martin currently has production capacity for 14,000 cars per year.  This is 2.2X more than they have ever needed.  How they ended up with this much capacity defies all logic but then again, it wasn’t too long ago that Aston was playing around with submarines and apartment buildings. Even Stroll’s ambitious recovery plans only get Aston to 10,000 cars per year in 2025.  A major restructuring to take capacity down significantly has to be coming.  Kenneth Gregor, the CFO, indicated as much but provided zero details on cost and timing.  I would expect this to happen as soon as Aston can afford to do it as all that extra capacity is an huge on-going drag on the P&L.
  • Works Formula 1 Team: Stroll has made quite a big deal about the Racing Point F1 Team becoming the Aston Martin Works F1 Team starting in 2021. The use of the word “Works” is certainly a creative one as there is currently no shareholding relationship between the two.  In fact, it’s just a marketing relationship with Aston Martin paying Racing Point a sponsorship fee.  In the Q3 Results and Strategic Announcement document, Aston states that: “The Company will move into the more profitable segment of mid-engine cars by transforming Formula One TM technology out of the Aston Martin F1 team into its performance road car business” which is a lovely marketing story but doesn’t pass the sniff test.  Given these are two completely separate independent organizations linked by a marketing sponsorship agreement only, how is F1 technology being transferred and transformed? In addition, I’m not sure what technology Racing Point actually has to transfer given they are an engine customer team and in terms of chassis development, they are best known for copying last year’s Mercedes-Benz.  The other interesting point here is that Stroll still hasn’t wanted to mix the two ownership structures and put Racing Point at risk if the problems at Aston Martin turn out to be terminal.

To say Stroll, Moers, and their teams have their work cut out for them is the understatement of the century.  The new Mercedes Benz technical partnership gives Aston Martin access to the technology it needs to be able to relaunch the current line up and deliver the next generation of cars.  It also allows Mercedes to “rent” Aston before they decide to “buy”.  The lack of transparency on the DBX order book is highly concerning, but the plans for the relaunch/facelift of the current line starting in the back half of next year is reason for hope.  Financially Aston is a long way from being out of the woods, but they have bought themselves a few extra years at a fairly steep price.  There is likely more pain for the organization as a restructuring is in store to address the excess manufacturing capacity.  I do give Stroll and his new management team high marks for getting the deal with Mercedes done and the financing in place while standing in the middle of a massive turd of a situation.  While the confidence and vision are refreshing, it’s going to take flawless execution to get them out of what is still one big odious mess.

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10 Thoughts on Aston Martin’s Mercedes Deal & Q3 2020 Results
    John
    31 Oct 2020
    10:28am

    Aston have won the right to buy Mercedes technology for a short period of time at commercial rates, and given away 20% of itself in the process. A win-win situation, for Mercedes.

    Stroll managed to gain control of Aston though a minority share holding and even then he got his mates to pay for it. Fly. But then when you look at how he became a billionaire it gives you a clue. Copied his father, and managed to get a partner who had unbranded Chinese goods which they they put the Kors mark on. It’s about image and looks, not substance.

    That theme continues in to Aston when he’s not revealing DBX figures. I’ve no insight in to them at all, but back when Aston were claiming 1,800 sales only 1,200 were apparently from customer specified orders. That meant 600 must have been dealers. And Aston has a history of building too many unwanted Reichman Vantages and pushing them on to dealers. A good period of time passed, lots of PR launches, and sales have crept to over 2,000. If it was nearer 3,000 you’d bet they’d be telling you!

    Where’s Reichman? Hopefully trying to find a new job. I believe Walmart might want him to design a new Trolley, but are unconvinced by his 9 wheeler concept with broguing on the handle, or that it will now be a pentagon…

    Can Aston achieve their sales targets? Valhalla and Vanquish will not work in their current form. Valhalla is for collectors and speculators, and there’s significantly less of those now. Vanquish is supposed to be mainstream, but is too compromised by the LeMans prototype form factor. And it’s a segment that’s hugely busy that even Ferrari only dip one of their toes in to. In fact, look at Ferrari and you realise it’s more of a GT company with the 812, GTC4Lusso, Roma, and Portofino. Only the F8 is a mid-engined supercar. Aston should stick to GTs, and if they did and did them well, yes it could reach its sales targets.

    How to do the GT well? Aston themselves have blamed Reichman designs for not selling so they have half the answer already – Sack Reichman.

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    Ferrari's Q3 2020 Results | karenable
    9 Nov 2020
    12:28am

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    JB
    7 Nov 2020
    12:44pm

    Excellent read – thanks for the insightful critique and analysis.
    Whilst the DB11 is not a looker (IMHO) the Vantage Roadster is much improved and has received some good reviews. Similarly the DBX ‘should’ be a success – it has the right ingredients. Fingers crossed AM can get their show back on the road.

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    Rich
    31 Oct 2020
    8:11am

    Highly intelligent analysis, as usual. I am an Aston Fan so hearing it is difficult. I am wishing them the very best of success and am trying to promote them non social media.
    Agree the future targets are ambitious but I guess they have to be to inspire confidence and attain success. The deal with Mercedes is on very tough terms but I guess they had very few cards to play. I have been hoping that Tobais’s contacts can ensure critical supply contracts can be fulfilled .

    The present share valuation of 1 Billion is better than I had expected, as several years ago when the Italian backers came on board, it was worth Mercedes new proportion of 200 mil.

    Irrespective, they needed something to be done very quickly and I dearly hope that they have the resources to buy them time to launch new cars. They needed to Loose Reichman, as he lost the traditional Aston buyers with un cohesive designs (I understand the guy that designed the One 77 is still there and he should be promoted).

    One good thing is that their present range of cars on the used market has plateaued at circa 100k, whilst Audi and Mercedes, McLaren are dropping below that 👍. Showing at a price point even during Covid that there is strong demand. Vanquish S volutes are still above £140k.

    The DBX has grown on me and I believe will sell well and I dearly wish the new team all the best for the future, (considering they were left with basket case and Covid multiplied that ) they seem to be in capable hands.🙏

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    desf
    2 Nov 2020
    11:02am

    How does this deal impact Aston’s V6 development? Did they pull a plug on this supposedly close to finished project? Or maybe powertrains are just a small part of this deal, and they’re still focusing on getting their own engines under the hood?

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