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Aston Martin Isn't a Patch on Ferrari

Aston Martin Isn't a Patch on Ferrari

(Bloomberg Opinion) -- Barely a year has passed since Aston Martin Lagonda Global Holdings Plc listed shares in London and persuaded investors it deserved a premium valuation similar to that of Ferrari NV. The luxury carmaker’s preliminary yearly results, published on Tuesday, were a reminder that its management badly misjudged both the strength of the brand and the resilience of its balance sheet.

In reality Aston Martin isn’t a patch on Ferrari and instead faces an uphill battle just to keep the lights on. A year ago the U.K. company told investors that its dealers would probably purchase about 7,200 vehicles in 2019. In fact, wholesale volumes fell 7% to a dismal 5,800 (or about 5,900 if special models are included).

Instead of the 24% Ebitda margin promised in 2019, Aston Martin achieved only 13%. This means it almost certainly lost money for the second year running. The ratio of Aston Martin’s indebtedness to Ebitda — at more than 6 times — is alarmingly high. About 3 billion pounds ($3.9 billion) of equity value has gone up in smoke since the initial public offering.

Aston Martin wants investors to look past all this and focus on promising orders for the DBX sports utility vehicle, on which the fate of the company depends. Access to a second $100 million tranche of debt financing was contingent on quickly gaining 1,400 orders for the DBX, which Aston Martin has achieved.

While that’s a relief, that Aston Martin now plans to draw on this very expensive borrowing reveals how fragile its finances have become. And even this might not be enough to tide the company over until DBX sales start in the second quarter.

Management is reviewing funding options, including the possibility that strategic investors make an equity investment. A capital injection would reassure Aston Martin’s bondholders — while the sterling bonds sold off on Tuesday, they remain well above the October lows. But existing shareholders, who’ve suffered plenty already, must fear getting diluted (unless they engineer a takeover).

Aston Martin Isn't a Patch on Ferrari

In view of its salience to cash flow, the focus on the DBX is understandable, yet it shouldn’t distract from the pretty lamentable performance of Aston Martin’s core business. On Tuesday luxury rival Rolls-Royce (owned by BMW AG) confirmed its sales increased by one-quarter last year. Ferrari is expected to report a 34% adjusted Ebitda margin for 2019, almost treble what Aston Martin achieved.

The British carmaker has been guilty of pushing too many cars to dealers, which puts downward pressure on pricing. Rectifying this will be a slog. Residual values for luxury cars have softened, according to Goldman Sachs Group Inc. analysts, which might make customers reluctant to pay top dollar for a new car and can make leasing expensive. Aston Martin managed to cut an inventory overhang toward the end of the year only by stepping up financing support and marketing spend.

Though difficult to quantify, negative headlines about Aston Martin’s finances probably aren’t helping dealers shift models. Plenty of its customers are banker types who’ll know better than most how precarious the situation has become.

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 Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.

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