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By Gary Newman | Wednesday 12 September 2018
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
I’m a big fan of Aston Martin cars and it is one of the most famous brands from the UK, but I can’t see myself rushing to buy shares when the IPO takes place in early October. More details on exactly how the floatation will be structured should become available when the car maker publishes a prospectus around September 20, but it is expected that it will be seeking a valuation of around £5 billion.
Whilst it is an iconic brand, having been associated with the James Bond films over many years, and has a history dating back more than 100 years, it has also had its share of problems and has been on the verge of bankruptcy on a number of occasions – although that is fairly ancient history now. The floatation will make the company worth more than the only other listed company in this market, Ferrari, but I have to wonder if the valuation being placed on Aston Martin is justified.
It is true that sales of its vehicles have been on the rise in recent years, and it plans to ramp up the number of cars it is producing from 6,200 to 6,400 this year, to around 10,000 by 2020, and then will target an eventual figure of 14,000 once its new plant in Wales is at full capacity. It is also branching out from purely offering sports cars, and an SUV is planned in the next few years.
I am sceptical of IPOs in general though, as the people who usually do well from them are those who were holding shares prior to the floatation, rather than those who take part in the IPO or buy on the open market when the company lists. But I do expect that the name alone will be enough to get some interest. It is also often the case that in the financial period prior to an IPO companies make their balance sheet and profit and loss figures look as attractive as possible, whilst of course staying within the rules, in order to achieve the maximum valuation possible.
If we take a look at the last set of accounts for the year ending December 31 2017, the company made a pre-tax profit of £86 million odd compared to a loss of £162 million in 2016, and revenue was also significantly higher at £875 million compared to £593 million. Part of the turnaround was due to it cutting its administration costs and also as a result of significantly lower finance expenses – a £26 million net loss on financial instruments was recognised in 2016. Forecasts are that Aston would trade at roughly 20 times earnings next year, if it achieves its target valuation on listing, and some will argue that it isn’t too dissimilar to Ferrari at a 15 times multiple.
But the reality is very different due to the way in which Aston Martin accounts for its development costs. These aren’t shown on the profit and loss account, but instead appear in intangibles under non-current assets – for instance in 2017 more than £213 million was added to development costs under this category, yet none of that cost was recognised against profit for the year. It is a similar story with the cash flow statement, which shows over £343 million in cash flow from operations, yet recognises none of the development costs which are shown as an outgoing under investment activities. Obviously there is nothing strictly wrong with the method of accounting otherwise the auditor wouldn’t sign off the accounts, but it does give a very skewed picture of where the company actually is in terms of value, and I believe the gap to Ferrari is far bigger than it might first appear and the Italian car maker offers far better value for money.
Net asset value of the group comes in at a little under £150 million, so I would argue that on that basis the IPO figure looks very high. It has appointed a number of heavyweights to the board recently as part of the IPO plans, and the first six months of 2018 saw pre-tax profits rise by 2.5% to £20.8 million, off £445 million in revenue. But even if it manages to achieve the growth that it is hoping for, I still find it hard to see how the company is worth £5 billion, especially when it is dependent on the world economic situation remaining buoyant if it is to achieve its forecasts.
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