Sports car manufacturer Aston Martin sounds like it could be a glamorous and profitable investment. But when a company floats, the sellers usually know a lot more than the buyers. I’m always keen to understand why the sellers are so keen to cash out.
To find out more about this high-profile flotation, I’ve been taking a look at Aston Martin’s IPO prospectus — a set of financial information provided by the company as a guide for potential buyers of its shares.
Motoring ahead
The customer appeal of the Aston Martin brand is unmistakeable. But as my colleague Rupert Hargreaves has pointed out, this company has already declared bankruptcy no fewer than seven times.
As a potential investor, I want to see some evidence that this business is now on a stable financial footing. I don’t want my IPO cash to be used to bailout the firm.
Back in profit — just
A look at the firm’s financial statements for since 2015 shows me that Aston Martin clocked up losses totalling £90m in 2015 and 2016. Only in 2017 did the company return to profit.
Last year’s performance seems pretty decent. The firm clocked up an operating profit of £149m on sales of £876m. This gives an operating margin of 17%, which I’d normally say was quite good.
However, I do have a couple of reservations. The first is that last year’s 17% operating margin is well below the 24% figure reported by Ferrari.
My second concern is that Aston Martin appears to boost its profits by ‘capitalising’ some of its R&D costs. What this means is that it books them as assets on the balance sheet, rather than treating them as operating expenses and subtracting them from its profits.
The easiest way to understand the impact of this (legitimate) technique is to look at the group’s cash flow statement. Despite being profitable last year, the group didn’t generate any free cash flow for its shareholders. After financing costs, my sums show that free cash flow was -£2.4m in 2017.
Too much debt?
Aston Martin’s accounts show a net debt of £673m at the end of 2017. According to the prospectus, net indebtedness had risen to £822.4m by the end of June this year. Total shareholder equity at this point was just £153.1m.
I find this a bit worrying. Net debt looks high to me, at 3.7 time’s adjusted earnings before interest, tax, depreciation and amortisation (EBITDA). I normally look for this multiple to be below 2.5x.
The rapid rise in debt also suggests to me that this firm may be spending more than it can easily afford to try and catch up with rivals such as Ferrari.
I can’t afford it
My final concern is that Aston Martin is targeting a market-cap of between £4.0bn and £5.1bn after its flotation. Taking the midpoint of £4.5bn would value the shares at 59 times the group’s 2017 net profit of £76.8m.
Although the company is projecting significant growth over the next few years, this valuation seems too high to me.
My view is that Aston Martin’s accounts don’t show the reliable profits and strong cash generation I want from an investment. For these reasons, I’ll be avoiding this stock when it floats later this year.