Aston Martin Stock: I Continue To Avoid (OTCMKTS:ARGGY)

Aston Martin (OTCPK:ARGGY) continues to make bold moves to improve its balance sheet and pursue an aggressive growth plan. They may or may not succeed in that regard but I see risks for shareholders even at the current bombed out share price.

I have moved between sell and hold ratings, with my most recent piece in July (Aston Martin: Beware Of The Crocodiles) taking a neutral rating. I now move back to my original “sell” position.

Latest Fundraising Means Further Dilution

The company announced last month that it had completed a £654m capital raise first announced in July. That involved Saudi Arabian sovereign wealth fund the Public Investment Fund holding an 18.7% stake in Aston Martin, and Geely Holdings (OTCPK:GELYF) also investing. Geely said separately that it now has a 7.6% stake in Aston Martin.

That means that there are now 699m Aston Martin shares in circulation, slightly more than triple the number when the company floated in October 2018. Shareholders have been heavily diluted already due to the company’s need to boost its balance sheet in the years since flotation (though even without the dilution, their return from the IPO date would still be deep in negative territory). The company clearly has no qualms about such dilution (and arguably it is all shareholders’ best interest since without it I think there is a question mark over the carmaker’s survival) and I expect that it will take a similar view in future. So I see ongoing risk of dilution due to the company’s weak balance sheet.

Even after the latest fundraise, the balance sheet remains a big concern in my view. Net debt at the end of the first half stood at £1.3bn. Free cash flow was a £234m outflow in the first half, although the company forecasts positive free cash flow in the second half. Only some of the proceeds of the recent capital raise were proposed to be used to pay down the company’s existing debt. The company announced in October a debt repurchase costing around $200m. While I see that as positive, it means that the latest share issue has essentially bought the company time. It has not fundamentally changed the challenge of carrying substantial debt on the balance sheet. In the first half alone, Aston Martin spent £63m on net interest payments, equivalent to 12% of its revenue for the period.

In the long term, even if revenues grow and the company becomes strongly profitable, the balance sheet remains an issue. The sorts of investors buying in to the recent issue are strategic. Key investors now involve the company’s executive chairman, Mercedes, Geely and the Saudi sovereign wealth fund. Those are large, sophisticated investors and in at least some cases can be seen as strategic rather than financial. Their interests do not necessarily coincide with those of retail investors seeking financial returns, in my view, and they are in theory at least better placed to make sophisticated financial judgments than many small retail investors like myself.

The Business Still has Work to Do

I started with a discussion of the fundraise and balance sheet because right now I think it is more important than the business fundamentals.

The business has been on an aggressive plan to grow sales in the past couple of years, which has seen it cycle through multiple chief executives.

In its half-year results, the company said it was “on track to deliver medium-term targets”. Those targets are c.10,000 wholesales, c.£2bn revenue and c.£500m adjusted EBITDA by 2024/25. Here is what that means compared to the most recent full year results.

	2021	2024/25 target	gap
Wholesales	6178	10000	38%
Revenue (£bn)	1.095	2	45%
Adjusted EBITDA (£m)	137.9	500	72%

Click to enlarge

Table calculated and compiled by author using data from company announcements

Here is how the company performed in the first half against these metrics.

	1H 2021	1H 2022	change
Wholesales	2901	2676	-8%
Revenue (£bn)	498.8	541.7	9%
Adjusted EBITDA (£m)	48.8	58.6	20%

Click to enlarge

Table calculated and compiled by author using data from company announcements

I regard EBITDA as a junk measure let alone adjusted EBITDA. But looking at wholesale volumes and revenue, there is clearly work to be done. With a timeline of just two to three years, while it is possible the targets can be hit, it will take significant effort in my view given the current sales trends.

That is not to take away from the strides the company has made in recent years, from widening its model lineup to strengthening its brand. With its iconic brand, great motoring legacy and installed user base, Aston Martin has the makings of a great business. But on its own that does not mean that it has the makings of a great investment for a retail investor like me, especially given its balance sheet.

Valuation is Impossible

It is the balance sheet that concerns me when it comes to valuing Aston Martin, which currently has a market capitalization of around £750m.

How to value the loss-making, indebted company with its recent history of shareholder dilution?

The sales targets could provide one way, and Aston Martin has also shared some level of target margins for certain models at least. But for now the sales targets are just that. Interest will remain a big cost even after the latest fundraise and there are other risks, such as the possible negative impact a recession in many key markets may have on sales.

For now I see no way to value the shares with confidence and regard the company as uninvestable from the perspective of a small retail shareholder like myself. I feel a “sell” not “neutral” rating is therefore suitable and downgrade my rating accordingly.