Aston Martin’s (LON: AML) share price chart makes for exceptionally grim reading over all time periods. It is down by 70% since the start of the year and has fallen by 96% since the company’s IPO in October 2018. Indeed, it has declined by 47% since its lack of investment appeal was discussed by this column around six months ago.
Now, the luxury automaker is seeking to raise £654m via an equity placing. It includes a proposed placing of 23.3m shares at a price of 335p to Saudi Arabia’s Public Investment Fund alongside a four-for-one rights issue at a price of just 103p per share. This equates to a 78.5% discount to its share price on 2 September, which was the day prior to the placing announcement.
Debt problems for Aston Martin
Aston Martin intends to use up to half of the £654m raised to reduce its debt pile. This is extremely welcome, since in the first half of the current year its debt interest payments were covered only 2.5 times by revenue. They were not covered by operating profit, since the firm made a £90m operating loss.
However, reducing debt by up to £327m is unlikely to drastically improve the firm’s financial position. After all, total debt stood at around £1.3bn as of June this year. Reducing it by £327m will still leave roughly £1bn of debt. Since the firm’s net assets currently stand at £378m, it seems likely that its total debt will still exceed net assets after the equity raise.
In an era of rampant interest rate rises, which are forecast to move substantially higher in the UK, US and Europe over the coming months, the company could face ongoing financial challenges due partly to its highly leveraged balance sheet.
Uncertain sales prospects
Furthermore, the prospects for automakers are extremely difficult due to an uncertain global economic outlook. War in Ukraine, a severe slowdown in China’s economic growth rate and increasingly tight monetary policies in developed markets mean that economic forecasts have been lowered.The IMF, for example, expects global growth to slow to 3.2% this year, and then to 2.9% next year, from growth of 6.1% last year. As a result, demand for a range of consumer goods, including luxury vehicles, could come under pressure. This may mean that Aston Martin’s capacity to further raise average selling prices, which more than offset a fall in vehicle sales volumes in the first half of the year, may be somewhat limited.
Investment potential
Aston Martin’s share price prospects remain highly uncertain due to internal and external factors. Although it has made progress in building on strong brand credentials, as evidenced by 60% of customers in the 12 months to June 2022 being new to its products, its financial position remains relatively weak. Given the prospect of a global economic slowdown amid rising interest rates, its capacity to move from a loss-making position to consistent profitability seems limited.
Therefore, even after losing almost all of its value since IPO around four years ago, there appear to be more favourable risk/reward opportunities available elsewhere for long-term investors.
