Cube Midcap Report (13 May 2020) – Aston Martin’s debt whack-a-mole

Cube Midcap Report (13 May 2020) – Aston Martin’s debt whack-a-mole

Good morning!

There has been lots of macro news to consider in the last 24 hours.

The most important of these is probably the extension of the furlough scheme for four months by the Chancellor.

7.5 million people are on this temporary government payroll, which I understand to be significantly more than the government originally anticipated.

So the scheme has supported far more people and for much longer than was expected (it was originally designed to expire this month).

There is nothing more permanent than a temporary government programme – it is very difficult to turn off the money taps, after people get used to them.

The UK’s Q1 GDP is down 2%, including a 5.8% fall in March.

That March result is the biggest monthly decline ever, but it is sure to be dwarfed by the result for April.

Let’s not dwell on that. Time for some company news:

  • Aston Martin (AML)
  • Applegreen (APGN)
  • Ferguson (FERG)
  • Taylor Wimpey (TW)

Finished at 6.30pm. Hoping for an earlier performance tomorrow!


Aston Martin

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Market cap £523 million
RNS 1st Quarter Results
Writer disclosure No position.

This company has lurched from bad news to bad news since floating in late 2018.

A few weeks ago, it staved off disaster by raising £536 million in new equity at 30p.

30p looked “cheap” compared to prevailing share price. But the share price has continue its collapse, and now approaches that 30p level.

Cash/debt performance

Net debt at the end of 2019 was a massive £876 million – or £988 million including lease liabilities.

Today we learn that the equivalent figure for the end of Q1 is £614 million, this number being calculated after including the rights issue proceeds.

In rough terms we have the following Q1 cash performance:

  • opening net debt £988 million
  • cash outflow in the business of £92.6 million
  • net proceeds for new equity of £467 million (calculated this myself by deduction)
  • closing net debt £614 million

Cash burn of nearly £100 million in Q1 is quite discouraging, isn’t it?

Cash burn could have been much higher than this, but the “operating” cash flows benefited from a very large (nearly £50 million) working capital inflow as customers paid off AML’s receivables. I guess that is due to the reduced sales, speaking of which…

Sales performance

Vehicle wholesale volumes reduced by 45% compared to Q1 2019.

Revenue did worse, down by 60% to the very low level of just £79 million for the quarter

The average selling price collapsed to £98k for a number of reasons. Ultimately, there were too many units at dealers and too few willing buyers.

The new Executive Chairman, Lawrence Stroll, is still “enthusiastic and confident” in the multi-year plan:

My immediate priority is to rebalance supply and demand, reducing dealer stock. Although nearly all our dealers are compromised and our factories were closed, we are focused on achieving results and delivering our plan.  We have made very good progress very quickly, with dealer inventory down 428 units in just one quarter, more than double the level achieved in the whole of 2019.

The new luxury SUV, the DBX, is on track for deliveries in the summer, and participation in Formula One is predicted to give a big marketing boost next year.

Covid Update – manufacturing in Wales has started again, in line with public health guidelines. Work at the Warwickshire headquarters will start later. Most employees are furloughed.

Dealerships are still mostly closed, except in China.

Outlook

The business is being “reset to enable it to operate as a true luxury company”.

No guidance is given for the current year.

Assurance on the balance sheet is weak:

Given the ongoing uncertainties, as is prudent, the Company continues to review all future funding and refinancing options to increase liquidity

My view

Far from fixing the balance sheet, the equity raise has merely repaired the damage done by recent losses.

It is enough to pay for perhaps 18 months’ of cash burn, based on recent performance (nearly £300 million burned last year, and nearly £100 million burned in Q1).

Thanks to that very high recent burn, the balance sheet is still stretched for what is now a smaller business. After its recent equity raise, AML calculates that it has an adjusted, trailing leverage multiple of 10.4x – very high.

I think I did investigate shorting this a few months ago, but I found that it wasn’t permitted on spreadbet. Shorting it is still the only type of participation I would be interested in.

A ruined economy is bad for big-ticket, discretionary spending and this company hasn’t performed well even when the economy was strong.

I wish the new investors and new chairman well with their new strategy, but AML shares are one discretionary purchase that I will be steering well clear of.

 


Applegreen

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Market cap £338 million (€383 million)
RNS Banking facilities and trading update
Writer disclosure No position.

Petrol stations have been unusually positioned during this crisis – open, but with much lower demand.

Today, Applegreen announces that it is going to have access to an extra €52.5 million in its credit facility (converted from an accordion) and that the lenders are going to relax the covenants until June 2021. It does not expect to need the extra funds, but wants to have them ready just in case:

We reiterate our view that we have sufficient cash to get us through this cycle based on a scenario where movement continues to be severely restricted to the end of May with the expectation that restrictions will then ease gradually before normalising in Q4.

A similar deal with the lenders to its subsidary Welcome Break is expected soon.

Trading in Q2 is currently ahead of the company’s assumptions at the outset of the pandemic. Traffic is picking up.

Welcome Break’s cash burn has been higher, since it has a major focus on food sales. It might start trading again soon:

We are anticipating a gradual recovery in volumes and are in the process of re-opening some of our food offers to meet that increased demand.

My view

For the last few years, I’ve been turned off by the very high rating attached to a company with quite ordinary quality metrics.

It’s much more interesting around these levels. Do bear in mind that it is highly leveraged – net debt of €503 million at year-end. If you add lease liabilities into the mix, you get €1.2 billion.

In the most recent results statement, they said “We have commenced a detailed review of assets in our estate that are considered non-core.” Perhaps there will be a debt-reducing disposal?

With the share price having halved and with lenders being supportive, I think a value hunter might reasonably want to start investigating this in more detail.

 


Ferguson

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Market cap £14.0 billion ($17 billion)
RNS Q3 2020 Trading Update
Writer disclosure No position.

I looked at these in March.

This update is for the quarter ending in April.

The table below shows the various trends. I’ve highlighted the two which I think are most important:

As you can see, Ferguson’s North American operations suffered a revenue fall of 10.5% in April. I’m surprised that the lockdowns had such a mild impact – maybe because some US states had shorter and less strict lockdowns? I see that parts of Ferguson actually grew in the US during April, e.g. Waterworks.

In Canada, as in the UK, construction starts again this month, so Ferguson is optimistic that it can improve.

The UK business, Wolseley, was much harder hit in April than the Americas, and declined by 60%. This business is going to be spun off, “although timing will depend upon the stabilisation of market conditions”. The valuation for that business in the present climate will surely have taken a huge hit.

Net debt at the end of April was $1.8 billion, and trailing net debt/adjusted EBITDA is a very modest 1.0x (compare to Aston Martin).

Available liquidity is $3.1 billion.

Adjusted profit for the Americas business in Q3 was $334 million (only down 1.5% compared to last year).

Wolseley, by contrast, fell into a loss.

Outlook

We continue to operate as an essential business with the majority of our branches open and serving customers as much as possible. Ferguson remains well positioned for long-term success operating in attractive and fragmented markets with a robust business model and backed by a strong balance sheet and liquidity position.

My view

Not much to complain about here, it’s a solid performance and it looks well-positioned for more of the same. Just a pity that the demerger won’t do much for shareholders given the (hopefully temporary) collapse at Wolseley.

 


Taylor Wimpey

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Market cap £4.7 billion
RNS Phased reopening of sales centres and show homes
Writer disclosure No position.

The market wasn’t too impressed with this announcement (bear in mind that the FTSE overall is down 1.5% today).

  • show homes and sales centres will have pre-booked appointments from May 22nd.
  • majority of sales staff to be recalled from furlough by May 18th, most of the rest by month-end.
  • construction underway at majority of sites in England and Wales

Trading update – the order book has increased compared to a year ago, but actual sales during lockdown have slowed dramatically.

Sales per outlet have been running at just 0.3 homes per week (versus 0.96 in 2019).

My view – it was reasonable to expect sales centres to start opening again soon.

 


 

Sorry for the slow service today. See you bright and early tomorrow!

Graham

 

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    #AML. Should not been allowed to go public trading ever. In Uberluxury sector by definition you want to have scarcity build into your products. Thats the opposite of what investors are looking for in investments. Isnt it? Lamborghini numbers Are cleverly hidden in the VW books.

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