Aston Martin Lagonda (AML) Ordinary 10p

Aston Martin's revenue fell 10% to £268mn in the first quarter. This reflected a 26% fall in volumes, driven by a 63% fall in SUV models as changes to the portfolio were made. This more than offset a 12% rise in Sport/GT models, and a 150% increase in higher-margin Specials. Average selling prices (excluding specials) were down 2% from the same time last year, at £176,000.

Operating losses widened by around 15% to £59mn, reflecting an increase in operating expenses.

Free cash outflow increased to £190mn, up by £72mn from the same time last year. Net debt grew by 20% to £1.0bn.

Despite performance for the quarter being below expectations, guidance for the full year is unchanged. This includes delivering positive free cash flow in the second half of the year.

The shares fell 7.4% in early trading.

Our view

First quarter results highlighted Aston Martin’s painful transition as it missed expectations across the board. To prepare for four new cars being released later in 2024, there was a planned reduction in production, with 25% fewer cars leaving the factory compared to last year.

The biggest victim of this “immense product transformation” was the SUV, as sales of the lucrative DBX model declined ahead of its revamped launch. Aston has placed its bets on the upgraded DBX707 and upcoming V12 sports car to drive sales in the second half. But with a similar performance expected in the second quarter, they are leaving themselves a lot to do if full-year guidance is to be hit.

The group's also focused on selling higher-margin Specials. Customers sign up and pay a deposit for these rare models before they're built, allowing for tighter working capital control. The cars have also become cheaper to make, thanks to efficiency improvements.

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

High debt has been a problem, which it’s committed to reducing once cash flows improve. In March, it refinanced £1.15bn of debt on better terms, leading to a reduction in future borrowing costs. Despite this, decreasing cash reserves caused the overall net debt to rise to over £1bn, up 20% on last year. Having recently had its credit rating upgraded by Fitch, this debt pile isn’t an immediate concern. But turning cash flow positive will be key to staying on top of these obligations and we’ll be tracking progress closely.

We're also aware that brand positioning could insulate it somewhat from the shift away from petrol, but electric is the direction of travel for automakers. The first hybrid cars are pencilled in for 2024 release, with a full battery Aston expected a year later. This transition to electrification and rising prices means capital expenditure is on an upward course. The group’s also 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.

The group faces challenges if it wants to come good on business targets. While its electrification strategy will be a key driver of long-term success, in the short term its new models must be block-buster hits. The valuation is likely to come under further pressure if there are any delays to the ramp-up of new models 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 carbon emissions from products and services are key risk drivers. Business ethics, labour relations and direct 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.

Important information - This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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.

Previous Aston Martin Lagonda updates