/ Company

A Spy Goes Public

By Imperial College Investment Society

Aston Martin is planning for an IPO, the first British automaker to do so in decades.

An article by Xerxes Chong Xian, member of the society. Please note that the below article was not written by a committee member of Imperial College Investment Society, and hence does not necessarily reflect its views.

Aston Martin, the iconic British marque desired for its understated class and elegance, has announced plans for an Initial Public Offering (IPO) within the year. The brand is synonymous with James Bond; the fictional, debonair, martini-sipping MI6 spy by author Ian Fleming. The brand began this world-famous association when a DB5 was selected to be the spy’s car of choice in the 1964 film “Goldfinger”. With its line-up of luxury automobiles enthralling the world for the past century, Aston Martin is revamping itself in a bid to compete with contemporaries in the luxury auto world. It is currently privately held, with Italian private equity group Investindustrial and Kuwaiti investment fund Investment Dar being the largest shareholders, owning 95% of the company between them. Daimler, parent company of Mercedes Benz, has a 5% stake.

The IPO

On August 29, 2018, Aston Martin submitted the registration document with the United Kingdom Financial Conduct Authority and have until September 20 to decide whether to proceed. Whilst details regarding the price range and size of float are due to be announced in a prospectus, the automaker is expected to have a valuation of up to £5bn. Deutsche Bank, Goldman Sachs and JP Morgan are the lead banks preparing Aston Martin for its IPO, whilst investment bank Lazard serves as the financial adviser.

The listing comes on a backdrop of consecutive profitable quarters, hailing a possible turnaround of a company whose history has been plagued by repeated financial setbacks.
Since its inception in 1913, the Midlands-based company has filed for bankruptcy 7 times. American motor company Ford purchased a 75% stake in the company in 1987 but eventually sold a majority of it to a consortium of buyers, which included current Kuwaiti shareholder Investment Dar. Cognisant of this troubled past, the company has appointed former board members of public companies to bring their experience to bear. Their diverse backgrounds in transport, accounting, hospitality and telecommunications will hopefully provide the corporate governance needed to steer the company in this next phase of growth.

Driven for success

Whilst Aston’s past has been smattered with red ink, Chief Executive Officer Andy Palmer and his “Second Century Plan” for Aston Martin will transform the 105-year-old British automaker to have it compete with the likes of Ferrari and Bentley.
Annual revenue has been rising steadily from 2009 to 2016, with a noticeable jump in 2017, buoyed by rising demand in North America, the UK and China. 2017 closed with a record wholesale volume of 5098 units, the automaker’s highest full year sales volume in 9 years.

graph1
Annual sales have been rising over the past 8 years. Source: FT

Palmer intends to launch 7 new models over the next 7 years. These include new models of the Vanquish and the Vantage, 2 sedans and even a rival to Ferrari’s 488. The “RapidE”, Aston Martin’s first all-electric model developed in collaboration with Williams Advanced Engineering also signals the company’s early adoption of electric cars. The company’s new production facility in Wales, where production of the DBX SUV will commence in late 2019, is on track for completion. Sales are expected to double to 14,000 units by 2020.

The biggest transformation is not merely the company’s offerings, but its status from premium automobile manufacturer to luxury lifestyle purveyor. From Aston Martin condominiums, powerboats and submarines to cashmere stoles and £2,000 picnic hampers. They even debuted a Vertical Take Off and Landing Aircraft concept in July 2018. This signals a pivotal shift in business strategy for the automaker.
With Brexit just around the corner, there are concerns about its effect on the IPO and the business. According to Chief Financial Officer Mark Wilson, the company has begun stock-piling engines in preparation for messy customs post-Brexit. The global market it commands may insulate the company from weakness in the UK and European markets. With the UK and Europe only accounting for 55% of sales, there is still room for growth, particularly in the Asia Pacific markets. A weaker pound may even be beneficial, given that 70% of sales are exported.

graph2
Aston Martin’s UK sales only account for 30% of global sales. Source: Financial Times

Author’s view

Whilst the glitz and glam of having a luxury automaker pursue an IPO may fool the uninitiated, more discerning investors will examine the purpose of the IPO.
This IPO serves as value recognition for its 2 largest shareholders. The 25% of total stock listed will come from the sale of stock from Investindustrial and Investment Dar. Whilst neither shareholder will be seeking a full exit from the company, the funds generated from the IPO will not be used to fuel growth for the company, but instead be a long-awaited payday for its shareholders. Daimler AG intends to maintain its 5% stake, in a show of longer-term commitment to Aston Martin.

According to Wilson, Aston Martin is seeking similar valuations to its Italian counterpart, Ferrari, whose shares have more than doubled since it listed in 2015. Viewing themselves as a luxury company, they hope to be awarded the same high valuations afforded to companies like Hermes International, LVMH and Ferrari. This despite the differences in financials between the 2 automakers.
It seems Aston Martin is simply riding the wave of optimism from its recent positive results, the relatively stable pre-Brexit market and an entitlement for a higher valuation, to reap profits for its shareholders.

Driving into the future

Keeping in mind the aggressive sales targets and grand vision for the automaker, the future will still be internally funded. Despite positive cash flows, strong sales and an expected decrease in capital expenditure, outstanding debt remains on the balance sheet and 7 years of investments lay ahead. The uncertainty of a post-Brexit world looms on the horizon. This IPO is bound to attract the financially savvy petrolheads, eager to own a slice of the beloved British marque. However, cautious investors will sit back to watch the story unfold, with hope the automaker rides out the coming years quite unlike Bond’s martini, unshaken.

Author: Xerxes Chong Xian
LinkedIn

Please note that this article was not written by a committee member of Imperial College Investment Society, and hence does not necessarily reflect its views.