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“Less stable than the car on ice”

Aston Martin offers “Art of Living” experiences which, in the past, have included driving experiences on ice. The Initial Public Offering of the company last week was less stable than the car on ice – remember the famous car chase in James Bond’s Die Another Day?

Aston Martin was priced at £19 per share and the share was trading £16.05 this morning (8 October 2018), a loss of 15% in 5 days. The pricing range was between £17.50 and £22.50. The implied market capitalization of Aston Martin at £19 was £4.3bn, somewhat lower than the original envisaged value of £5.1bn.

How to assess Aston Martin’s valuation? The only direct peer listed is Ferrari which was spun out of Fiat in January 2016. Ferrari currently trades on 21.2 x EBITDA. Using Aston Martin’s Adjusted LTM EBITDA as per prospectus, this would imply a per share valuation of Aston Martin of £17 before any IPO discount. But, can we assume that Aston Martin should trade on the same multiple as Ferrari, ignoring any issues with stock liquidity? Here are some comparative figures:

Aston Martin in £ mill Ferrari in Euro mill
LTM Sales 910.6 3,412.9
LTM EBITDA margin 24.1% 31.0%
2017 total R&D spend as % of sales 26% 22%
Capitalized R&D as % of sales 95% 25%
Accounting rules IFRS US GAAP
Source IPO prospectus 20F & interim report

As the two companies report under different accounting rules which affects the ability to capitalize R&D costs (Aston Martin amortizes capitalized R&D over the life of the model), these financials are not comparable at EBITDA level, much less at operating or net income level as the different treatment of R&D (mostly capitalized and amortized in the case of Aston Martin, mostly expensed in the case of Ferrari) will have a dramatic impact. Not only is Aston Martin’s margin overstated compared to Ferrari which only capitalizes 25% of total R&D spent, the company is also expecting a further reduction from 23.6% in 2017 to around 23% in 2018 due to a change in product portfolio.

What if we ignore all accounting rules and expense total R&D for both companies? Have a look at the below and make up your mind if you would rather buy Aston Martin’s shares or an “Art of Living” experience. Price on Application, by the way!

Aston Martin (£ mill.) Ferrari (Euro mill.)
  2015 2016 2017 2015 2016 2017
Sales 510.2 593.5 876.0 2,854 3,105 3,417
Adjusted EBITDA as per prospectus / 20F 71.4 100.9 206.5 719.0 843.0 1,036.0
Margin 14.0% 17.0% 23.6% 25.2% 27.1% 30.3%
Deduct capitalized R&D 122.0 116.5 213.2 154.0 141.0 185.0
Adjusted EBITDA post R&D (50.6) (15.6) (6.7) 565.0 702.0 851.0
Margin (9.9%) (2.6%) (0.8%) 22% 22% 25%
Total R&D spend 132.6 127.3 224.3 711 651 742
as % of sales 26% 21% 26% 25% 21% 22%

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