Aston Martin Lagonda (AML) Ordinary 10p

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Aston Martin’s third-quarter revenue rose 8% to £391.6mn. This was driven by a 14% uplift in wholesale volumes, which helped offset 5% lower average selling prices due to changes in its car portfolio.

Underlying operating losses more than halved to £21.7mn, helped by the increased revenue and lower depreciation charges.

Free cash outflows worsened slightly, from £78.5mn to £81.2mn. Net debt rose from £0.7bn to £1.2bn.

Recently downgraded guidance has been reiterated. This points to full-year underlying cash profit (EBITDA) margin in the high teens, and a free cash outflow over the second half of the year.

The shares rose 1.3% in early trading.

Our view

Aston Martin is on track to meet recently lowered full-year guidance. That was good to hear after a tough period for the group, and squeezing the most out of its new car models will be key to improving investor sentiment from here.

The group’s not alone in its struggles though, and the demand outlook for some other automakers is much bleaker. Aston Martin’s high price point arguably offers it some level of protection from general auto trends, given its buyers aren’t typically short of cash.

The higher price point stems from a shift in focus towards selling more Specials, which retail at a much higher value than its core offering. There’s also a push to increase personalisation in these cars, which it’s hoped will boost both desirability and profitability. And thanks to efficiency improvements, cars have also become cheaper to make, which helps to relieve some pressure on the bottom line.

While we're supportive of Aston Martin's enviable brand and product prowess, there are some things to be aware of.

There’s no getting around it, the high debt level is a real problem. It makes it difficult to obtain additional debt financing should demand slip and the group run into trouble. It refinanced £1.15bn of debt on better terms earlier this year, but the new debt still carries double-digit interest rates. This shows that its lenders need to be compensated heavily for the high level of risk they’re taking on.

The group still isn’t generating cash, which could spell further trouble if the group runs out of funds to meet these obligations. Improving cash generation and getting debt to a more comfortable level needs to be the key focus. It’s an area we’ll be tracking progress closely, and we wouldn’t rule out further disappointments down the road.

We're also aware that brand positioning could insulate it somewhat from the shift away from petrol, but electric is the long-term direction of travel for automakers. This transition to electrification means capital expenditure is on an upward course.

The group’s also been spending big on marketing. That’s a natural step when you’re trying to reposition a brand like AML, but we need some proof that money’s being spent to grow market share, rather than hold onto it.

Given the weak balance sheet, its new models must be blockbuster hits to keep the necessary cash coming in the door. While it’s already some way below the long-run average, the valuation is likely to come under more pressure if supply chain disruptions delay the planned ramp up in production. And there’s no dividend on offer to reward investors for their patience.

Environmental, social and governance (ESG) risk

Most of the auto industry falls into the medium risk category in terms of ESG. Product governance, particularly around safety, and the carbon emissions from companies’ products and services are key risk drivers. Business ethics, labour relations and operational carbon emissions are also contributors to ESG risk.

According to Sustainalytics, Aston Martin’s management of ESG risks is average.

ESG issues are overseen by the board and overall disclosure is strong. There’s a robust environmental policy in place, with a commitment to net zero for scope 1 and 2 emissions by 2030 and scope 3 emissions by 2039 and has interim targets in place. However, AML doesn’t divulge sustainability-linked revenue and environmental impact isn’t systematically considered in the design phase. Although some of AML’s facilities are externally certified, scope is unclear and its product and safety programme needs improvement.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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