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Aston Martin Is Struggling to Stay on the Road

Aston Martin Is Struggling to Stay on the Road

(Bloomberg Opinion) -- Can the company behind Aston Martin avoid tapping its shareholders? Yes, if everything goes to plan. The snag is that Aston Martin Lagonda Global Holdings Plc is proving increasingly accident prone.

Shares in the sports car maker fell as much as 22% on Wednesday. That’s all too familiar. The stock dropped 26% and 18% on consecutive days last week. The group is suffering from weak orders in Europe even as sales rise in the U.S. and Asia. A partner has defaulted on an intellectual property deal, costing 19 million pounds ($23.1 million). As a result, Aston has become even more burdened by borrowings, with net debt ending the first half at some 4.7 times the company’s own measure of Ebitda.

Equity investors are naturally worried about a possible share issue. Aston skipped the chance to cut debt by raising new money during last year’s initial public offering. As the share price has fallen, the awkwardness of selling new shares below the IPO price has risen. That said, one of the core shareholders, Italian investment group Investindustrial Advisors SpA, moved to increase its holding by 3% earlier this month at a price of 10 pounds a share. 

Aston Martin Is Struggling to Stay on the Road

A cash call is not yet inevitable. Aston’s story to shareholders is all about delivering the first sales of its new DBX sports utility vehicle in the second quarter of 2020, with further sports cars beyond. To get there, more capital spending is needed. The investment bill will probably be about 140 million pounds in the second half of this year. In addition, Aston needs to service its gross debts – 859 million pounds – at a likely cost of between 30 and 40 million pounds over the next six months.

The company isn’t selling enough cars yet to fund these burdens. Operating cash flow was just 21 million pounds in the first half. That is unusually weak, being affected by rising inventory as well as the defaulting partner. The guidance is for some recovery in the second six months of 2019 – deliveries should pick up and costs are being cut. There’s an overtime ban and a hiring freeze. But Aston is still likely to be chomping into its cash reserves to keep the show on the road. These stand at 127 million pounds.

The question is what happens if this cash pile starts being badly eroded. CEO Andy Palmer’s last internal lever to pull would be to cut capex more aggressively. That would in turn slow the introduction of new models, undermining the investment case. After that, he will have to look outside for cash. The group was at pains to say that its first source would be yet more debt.

In this scenario – an Aston Martin that has suffered perhaps more operational hiccups, is cutting capex and raising debt – who knows where the share price would be? Perhaps not much higher than if it just did a rights issue today and fixed its balance sheet.

Shareholders may be spared a cash call, but a recovery in the share price will need a bid or Aston’s run of mishaps to end.

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

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