Aston Martin: A view to a sell

Aston Martin intends to sell 14,000 cars in the medium term, once it has refreshed its range and the battery-powered Lagondas are on sale. It has already nearly doubled sales in the two years to the end of 2018 to 6,441 vehicles last year, and is targeting 7,300 units in 2019. Rapacious Chinese demand has in part underpinned growth thus far. But pursuing an aggressive production strategy poses questions when you are a luxury manufacturer, namely with regards to preserving the exclusivity of the product. The importance of exclusivity in this market is illustrated by a policy pursued until recently by Ferrari (US:RACE) of capping sales at 7,000. However, like Aston Martin, Ferrari is now revving up volume, especially in China, with record sales of 9,251 last year. Another luxury brand, Lamborghini, also has its foot down, raising 2018 sales by 51 per cent to a record 5,750 cars, while Porsche, which offers luxury at a lower average price point, also made record sales of 256,000. Increased output from competitors is only likely to make Aston's job of radically increasing production while maintaining brand value harder.

Aston Martin valued its brands at £298m in 2018, representing 20 per cent of its intangible assets – however, the biggest intangible was deferred development costs of just over £1bn or 68 per cent of the total. These deferred development costs rose by £202.3m in 2018 as the company capitalised 95 per cent of its £213.8m in research and development spend. There is nothing wrong with this per se, but the level of capitalisation (which means spending is recorded as an asset on the balance sheet rather than a cost in the profit-and-loss account) is high compared with Ferrari, which capitalised only €318m (£273m), or 38 per cent, of its €846m 2018 R&D cost.

Ferrari also amortised its deferred development costs at a faster rate than Aston in 2018. Ferrari's €115m amortisation charge represented 7.9 per cent the deferred development cost assets at the start of the period compared with Aston's 5.9 per cent based on amortisation of £49.1m. All in all, expensed and amortised R&D at Ferrari ended up as 76 per cent of the annual cash spend in 2018 compared with just 28 per cent at Aston Martin. The large difference suggests Aston could face margin pressure in the future if its profit-and-loss account has to take the stain of more R&D cost. 

There are also concerns that Aston Martin could struggle to finance its ambitious expansion plans. Such concerns have not been aided by the fact the company does not disclose the exact amount of its working capital that relates to customer deposits, although it has said this represents a "few hundred million". There has also been some disappointment about opacity expressed by analysts at Jefferies regarding the company's decision to reduce the detail provided on its cost-of-sales breakdown.  

The company has been more transparent elsewhere. Aston Martin’s suppliers are integral to it producing more cars. In November, chief executive Andy Palmer recognised that some of the company’s suppliers weren’t used to Aston Martin’s new annual output rates. In its fourth quarter, four suppliers experienced issues that created a backlog of semi-finished cars, around 100 of which ended up unsold. Aston Martin claims that the suppliers’ problems were remedied within the quarter, but this left the company pushing a quarter volume’s worth of cars within the last two weeks of December through dealerships, with some of those cars placed on credit. The company is now late winding back this credit and collecting these debts.

Aston Martin is clearly exposed to supply chain failures. It sources parts domestically and abroad, and while its foreign suppliers have kept up with its customers' increasing needs, Mr Palmer has suggested that there are “five to 10” UK-based suppliers that “might not make it”.

But Aston Martin can’t easily move towards foreign suppliers in order to plug this gap, owing to the potential of a no-deal Brexit. World Trade Organization rules of origin require products to be made with around 55 per cent of components derived domestically. Owing to the 12-week production lead time of its cars, the company is already operating under the terms of ‘no-deal’. While it has met the threshold for its products thus far, rules of origin will limit its ability to look overseas for new suppliers to replace struggling British partners for the foreseeable future.