Share Prices & Company Research

Press Release

06 September 2018

A fast and furious valuation

Aston Martin has signalled its intention to launch an initial public offering on the London Stock Exchange with a valuation of c.£5 billion that would place it amongst the FTSE 100 heavyweights on a valuation basis. That is a big number for a company whose earnings before interest, taxes, depreciation and amortisation (EBITDA) are expected to be in the region of £250m this year. Aston Martin has just released its first-half numbers showing an operating profit of £106m, up 14%, and revenue up by 8% at £444.9m.

There is really only one comparator to look to in terms of listed luxury car companies and that is Ferrari. However, a £5bn enterprise value (EV) would place Aston Martin at c.18 times this year’s expected EBITDA, compared to Ferrari’s current 20 times (EV/EBITDA).

Aston Martin expects to produce at least 6,200 cars this year, yet Ferrari made over 8,000 last year. If we look at profitability, Ferrari enjoys an earnings margin of 32% versus Aston Martin’s first-half margin of 24%.
A concern over Aston Martin’s numbers is the fact that they treat most of their research and development spending as a capital expense and it is on the balance sheet rather than being immediately written off against profits. If research and development had instead been treated as an operating expense then analysts calculate that Aston Martin would have been loss-making last year. 

You could say that the proposed valuation looks stretched based on current numbers; this is, after all, a company which has filed for bankruptcy seven times in its century-long history.

The key to justify the rating is the company’s projections for growth. By 2020 Aston Martin expects to sell between 9,600 and 9,800 vehicles, nearly doubling last year’s production. They are launching an SUV and also electric-only vehicles as they look to capture different segments of the market. On those kinds of sales numbers, if margins improve with scale, then the valuation multiples could feasibly more than halve based on the issue price.

They can also, just like Ferrari, point to very strong demand for their current vehicles that outpaces supply, with long waiting lists and the company taking deposits now for cars that won’t be delivered until late next year. A key question for investors is: Will the demand hold up as supply nearly doubles? If so, then the proposed launch price could well be justified, and the success of Ferrari’s IPO mirrored, as their shares have more than doubled since its listing in 2015.

However, being priced for perfection, as the proposed valuation would seemingly be, leaves little room for disappointment on those fast and furious growth plans.

Elsewhere, amongst the interested parties who will be keeping a very close eye on the valuation Aston Martin achieves are Volkswagen (VW) investors. Consensus estimates show that VW trades on a price of just 5.6 times this year’s expected earnings per share, according to FactSet (2018 P/E estimates). Yet the owner of 12 brands has a few luxury marques amongst its stable of more mass market names, namely Porsche, Lamborghini, Bentley and Bugatti. Should Aston Martin successfully get its initial public offering away, the pressure will mount on VW’s board to realise some of the ‘hidden’ potential value in those sub-brands. I say ‘hidden’ because the Financial Times estimates that if only the Porsche business was to be valued on the same multiples as Ferrari, then on a standalone basis it would have a value of over €110bn, a staggering number given the VW parent company itself has a market cap of only €70bn.

We are seemingly off to the races in the luxury car market space…

James Andrews, Director - Head of Investment Management

Please note, investments and income arising from them can fall as well as rise in value and you may lose some or all of the amount you have invested. Past performance and forecasts are not a reliable indicator of future results or performance. Please note that this article is for information only and does not constitute a recommendation to buy or sell investments mentioned.


 
A fast and furious valuation
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