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Aston Martin FY’23 Credit Summary & Outlook

Aston recorded healthy top line performance, with both unit sales up and significant pricing increases with revenues up 8%. Consequently, this was achieved on the back of a strong order book However the firm’s sales progress is being eaten up by high CAPEX costs. Also Gross margin is healthy at 39%, but OPEX is also high, leading to negative EBIT of -£112m.

• Outperformance in the Middle East, with an 82% increase in unit sales in 2023 to 2.2k units. Declining sales in the UK.
• EBITDA margin is currently 18.5%, with management targeting >20%, or c£400m-£460m FY’24.
• Cashflow was weak in 2023, burning through £178m in cash, due to high costs. 2024/25 is forecast by management to be cashflow positive, but still more than likely to leak >£50m due to high opex.
• Liquidity is still adequate, with an increase in the RCF to £170m, plus £229m in cash (Q1’24, and expected to see an increase in H2’24, due to working capital reversals).
• Leverage is at 3.27x pro-forma Q1’24. And forecast leverage in FYE’24 of c3.3x, and forecast to deleverage in 2025 to 2.5x.
• Equity cushion of £1.2Bln, Net Debt of c£1Bln with two key bonds:-
  • 10.375% £400m GBP 03/2029
  • 10% $960m USD 03/2029

Operating Performance

FY’23, top line revenue up 18% to £1.63Bln against £1.38Bln FYE’22.

Altogether, the cost base was more efficiently managed in 2023, driving up gross margin 7% even as wholesale commodity suppliers also see marked increases in costs. Gross profit up to £638m, with a gross margin of 39%. Equally important, OPEX has increased, through which development costs are charged. Some CAPEX costs are capitalized (typical for auto industry). Aston Martin incurred £260m in capitalised development costs. Therefore, these costs are added back to the adjusting items for amortization when calculating EBITDA. Hence the large gap between negative EBIT of -£112m and £302m in Adj. EBITDA.

As is evident from the numbers in the table above, Unit sales have increased significantly in 2023, with 8% growth forecast (guided by management) for FY’24.

UK Sales & Performance

UK customers seemed to have regained their confidence and taken their orders after the Covid period in 2022, and somewhat eased up in 2023, especially with the onset of rising rates in 2023. The UK saw a reduction in unit sales of 446 units, a decline of 26%. The US led demand was a lot more steady with 1.8k units sold in 2022 and again in 2023. The strongest market for Aston Martin has been the Middle East, with a substantial increase of 82% in sales YoY to 2.2k units. APAC is currently the smallest market for Aston sales with 323 units sold in 2023.

Sticker Prices

The second key revenue factor is the pricing of the cars, with the average sticker price increasing to c£245k, up significantly from c£177k in 2021. It is worth noting that pricing amongst their peers has increased across the board, with Ferrari, Bentley, Rolls Royce sticker prices all increasing 20-30% over the same period. Exclusivity is key to this market.  

High capex spend to stay competitive

They will have to continue their international offering to see 20% EBITDA margins targeted in 2024/5 but will have to spend heavily on CAPEX to achieve that goal. And more critically achieve EV efficiencies, which is a big gamble. They have cashflow to achieve that, but their cashflow is not strong enough to satisfy investors that the return on investment is worth it, yet. One aspect that helps telegraph Aston Martin’s turnover, is their order book.

Many orders are placed at least a year before delivery, so essentially it is easier for them budget & forecast correctly and manage supply/demand dynamics. They operate a very different business operating model to the large manufacturers like Ford, Audi, BMW or Mercedes, who rely on fleet demand and have to manufacture years in advance and rely more on the macro economic environment. Aston Martin rely on the more immediate and changeable demand from the UHNWI market.

Key 2024 guidance

• Revenue driven volume & price growth of c8% with forecast sales of £1.76Bln, with unit sales of c6.8k.
  • Gross Margin improvement towards 40%.
  • Adjusted EBITDA of c18%.

Market Dynamics Summary Outlook

S&P Global Mobility forecasts 88.3 million new vehicle sales worldwide next year as the recovery rolls on. Essentially underlining strong global growth, driven by consistent demand. With the brakes off the supply chain, the risk to further growth is that demand momentum fades as consumer uncertainty overtakes pent-up demand. Global new light vehicle sales in 2024 will see a 2.8% increase YoY in 2024.

The outlook for the automotive industry across Europe, the United States, and Mainland China in 2023 and 2024 highlights several key trends and challenges:

                                                        Europe

– 2023: Western and Central Europe closed the year with 14.7m units sold, marking a 12.8% year-over-year increase. This growth is attributed to improved vehicle production levels, which have helped reduce delivery times and recover inventory.

– 2024 Forecast: Sales are projected to rise by 2.9% to 15.1m units. This moderate growth reflects a range of factors:

  – Economic recession risks

  – Tighter credit conditions

  – Easing of pent-up demand

  – Continued high car prices

  – Reduction in electric vehicle (EV) subsidies

– Key Challenges:

  – Dynamic transition to electrification

  – Hesitant customers concerned about the shift to EVs, and government policy intervention.

  – Competition from Chinese OEMs

  – Energy supply issues

  – Upcoming EU elections

                                                     United States

– 2023: Sales volumes reached 15.5m units.

– 2024 Forecast: Sales are expected to increase by 2.0% to 15.9m units. The market faces several challenges:

  – Affordability issues due to high interest rates and tight credit conditions

  – Persistently high new vehicle prices

– Opportunities:

  – Growth in new vehicle inventory could lead to increased incentives and deals, alleviating price pressures

  – The introduction of nearly 100 new BEV models by the end of 2024 will provide consumers with more choices and boost BEV sales

  Mainland China

– 2023: The market recovered to 25.3m units, a 4.9% YoY increase. This recovery is supported by:

  – CNY100 billion extension of New Energy Vehicle (NEV) incentives

  – Improved local vehicle production

– 2024 Forecast: Sales are forecasted to grow by 4.2% to 26.4m units, driven by:

  – Gradual improvement in consumer confidence

  – Continued support from pent-up demand

– EV Market:

  – Affordability is expected to improve further due to declining battery cell prices

  – EV tax exemptions extended into 2024-2025

  – EV penetration rate is projected to increase from 36% in 2023 to 44% in 2024

Overall, while the automotive industry is poised for growth in 2024, it will also need to navigate economic uncertainties, evolving consumer preferences, and competitive pressures, particularly in the context of electrification and new market entrants. 

Ultra Luxury Segment (ULS) Market Dynamics and Strategic Outlook

 Aston Martin Key Operating Segments

1. Grand Touring (GT)

2. Sports Cars

3. Super Grand Touring (Super GT)

4. SUVs

5. Mid-engine Supercars

Key Competitors include – Ferrari, Lamborghini, Bentley, Rolls-Royce, McLaren and Porsche

Market Drivers and Trends

1. High Net Worth Individuals (HNWIs) and Ultra High Net Worth Individuals (UHNWIs)

   – The Middle East region, in particular, has seen rising affluence and demand from the emerging middle and upper classes.

   – Forecast: UHNWIs to increase by 28.1% from 626,619 in 2023 to 802,891 in 2028, with significant growth in Asia (38.3%) and the Middle East (28.3%).

2. Emissions and Economy Targets

   – Stricter regulatory requirements and consumer preferences for fuel efficiency are driving demand for more fuel-efficient vehicles.

   – Social and environmental awareness among consumers is influencing vehicle purchase choices, leading to increased demand for hybrid and electric vehicles (EVs).

3. Cost and Technology in Electric Vehicles

   – While cost remains a barrier, advancements in battery electric vehicle (BEV) technology are narrowing the gap with internal combustion engines.

   – The long-term shift towards electrification is supported by government and OEM targets to reduce CO2 emissions and increase EV adoption.

   – The luxury segment is also transitioning, with high-performance manufacturers developing hybrid and fully electric models.

Aston Martin’s Strategic Approach

1. Collaborations and Partnerships

   – Lucid Partnership (2023): Access to Lucid’s powertrain and battery technology for creating a bespoke BEV platform suitable for all product types.

   – MBAG Partnership: Supply of MBAG technology for current and next-generation vehicles.

   – Mercedes-Benz Group: Supply of V8 engines through a technical partnership.

2. Electrification Strategy

   – Development of a blended drivetrain approach between 2025 and 2030.

   – Launch of the first plug-in hybrid vehicle (PHEV), the Valhalla, in 2024.

   – First BEV targeted for launch in 2026, leveraging high-performance technologies.

   – Continuation of introducing new ultra-luxury high-performance core models and Specials.

3. Price Target

   – Average Selling Price (ASP) of vehicles increased by 55.0% from £149,000 in 2019 to £231,000 in 2023.

 Key Takeaways

– Growth and Resilience: The ULS market benefits from the growing number of HNWIs and UHNWIs, particularly in Asia and the Middle East.

– Technological Advancements: Advancements in BEV technology and strategic collaborations are crucial for maintaining competitive edge and addressing consumer preferences for electrification.

– Product Development: Aston Martin’s focus on a blended drivetrain approach and development of hybrid and electric models aligns with regulatory trends and market demands.

– Financial Robustness: Significant increase in ASP reflects strong demand and the brand’s positioning in the ultra-luxury segment.

By leveraging strategic partnerships with Lucid and Mercedes and focusing on technological advancements, Aston Martin aims to continue its legacy of producing high-performance luxury vehicles while adapting to the evolving automotive landscape. But will have to bear the cost of the shift to EVs, which will likely impact margins.

Cashflow, liquidity and capex

Cashflow remains reliant on the capitalised development expenditure. £260m in capitalised development expenditure was recorded as amortisation in 2023. CAPEX of £397m including £306m in development expenditure, and with a sizeable £91m spent on new manufacturing facilities, all leading to burning £178m in cash. As a result, Q1’24 saw another cash outflow, reducing the cash position to £229m, but they have increased the RCF to £170m.

Total liquidity at Q1’24, cash £229m and the £170m RCF, equates to £395m. According to management guidance, H2’24 is expected to be cashflow positive.

They have to see c£330m in CFO to have any positive cashflow, but are forecast to see c£280m in CFO, but not

deleverage the business in 2024.

leverage, interest and asset coverage

As a result of the adjusted LTM EBITDA FY’23 £303m, Leverage is now 3.27x … which was held back by the weaker cashflow as mentioned above, with a relatively modest cash position of £392m at FYE’23.

Adjusted EBITDA / Interest coverage  has increased to 2.77x from 1.41x at FY’22. Stronger CFO expected in 2024, will likely improve the cash flow and improve interest coverage.

OM Details

Bond Yield

For other research on EHYO please review on Arrow Global – https://www.europeanhighyield.online/arrow-global-q124-credit-update/