Aston Martin expects continued sales growth, IPO costs hit profits

Aston Martin Lagonda Global reported good underlying growth in its the first results since its 2018 flotation, though fell to a statutory loss due to listing costs.

The luxury car manufacturer sold 6,441 cars during the past calendar year, up 26% on 2017, as it ramped up the delivery of new models, with a new Vantage, DBS Superleggera and three special editions. The group's first SUV, the DBX, begins production trials in the second quarter of 2019 and its first electric vehicle, the Rapide E, is on track to start full production in 2019.

Strongest wholesale volumes growth was the 44% to almost 1,400 in Asia Pacific, with a 38% increase to 1,761 in the Americas, while the UK remained the largest market, up 17% to just under 1,800, and Europe Middle East and Africa grew 13% to just under 1,500.

Revenue of £1.1bn, up 25%, was a group record, while adjusted EBITDA increased 20% to £247m, with margins at 22.6%.

Chief executive Andy Palmer said 2018 was an "outstanding year" and as the UK's only listed luxury automotive group, "we have demonstrated our legitimacy in the global luxury market".

With the new manufacturing plant at St Athan, Wales almost complete and preparations for the DBX in advanced stages, he said expansion plans were "on track as we manage through the uncertainties and disruption impacting the wider auto industry". St Athan will be the centre for battery electric vehicle production and will therefore be the manufacturing home of Lagonda and the Rapide E.

Given this, he was confident about delivering another year of growth in 2019, bolstered by £30m set aside for Brexit contingencies.

The sales outlook for 2019 was reiterated for between 7,100 and 7,300 cars, with adjusted EBITDA margin at around 24% and an adjusted operating profit margin of around 13%. Adjusted EBITDA is expected to be lower year-on-year in the first half, as a one-off £20m benefit from the sale of intellectual property will not be repeated in 2019.

"Whilst we are mindful of the uncertain and more challenging external environment, particularly in the UK and Europe, we remain disciplined in our execution and maintain our guidance for financial year 2019, whilst also reconfirming our medium-term objectives."

Aston Martin shares skidded more than 16% lower to 1,147.05p on the day.

JPMorgan Cazenove said revenues were in-line with its estimates, while adjusted EBITDA margin came in 6% ahead of its expectations and in line with guidance of around 23%.

As the one-off £20m benefit from the sale of intellectual property will not repeated, analysts said this would mean to meet flat EBITDA margins, the company would need a 2% improvement in underlying earnings in 2019. "We think this mainly comes from the full year of the Vantage/DBS, removal of ramp-up costs and higher option contribution."

Cazenove noted that cash generated from operating activities was adversely impacted by a significant increase in working capital, including receivables of around £90m associated with supply chain delays during the fourth quarter and the consequential shifting of wholesale deliveries to the end of the period and "is expected to substantially unwind during the course of H1 2019".

Russ Mould, investment director at AJ Bell, said: "Underlying earnings in the first half of 2019 are set to be lower. So why does chief executive Andy Palmer describe last year as an ‘exceptional’ one for the group? Well it did post record revenue of more than £1bn with volumes ahead of guidance, but today’s negative market reaction suggests it has a lot more to do to win over the sceptics."

Looking at valuation, Kepler Cheuvreux analysts said "Ferrari appears to be the closest listed European peer group for investors, given its business proximity, and the other peers being either private or part of a large group".

With Aston Martin shares trading at 31.4 times earnings, three times EV/Sales, and 23 times EV/EBIT on Kepler's unchanged 2019 forecasts, this is quite close to Ferrari. For 2020, the ratios move to 17.4x, 2.25x and 14.2x respectively - a large discount to Ferrari's 27.2x, 5.6x and 20.8x respectively.

Kepler's discounted cash flow model uses a 9% weighted average cost of capital and 2.5% permanent growth rate, pointing to 1,469p fair value.