Aston Martin's parent company needs new passengers in 2020
Aston Martin’s parent companyhopes totake on some new passengers in 2020. They’ll be clambering aboard the luxury carmaker as it careens headlong toward a decisivefork in the road.
The reputation of Chief Executive Officer Andy Palmer depends in large part on bringing the market value of Aston Martin Lagonda Global HoldingsPlc back towardthe 4.3 billion pounds ($5.6 billion) where it listed last year, from 1.2 billion pounds currently. The only plausible way of doing sois to makea huge success of next year’slaunch of the company’sluxury sports-utility vehicle, the DBX.
Under Palmer’s strategy, the DBX was intended to be just one of seven new models that would helprevive the company. But poor sales of the group’s existing carshave put more pressure on this leather-clad gas-guzzler to drag the firm out of the mire. Prices of used Astonshave been declining, according to Goldman Sachs Group Inc., which in turn should reduce demand for new ones. Meanwhile, the companycan borrow cash only at punitive interest rates;net debt is expectedto totalabout800million pounds at year-end.
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All this means theDBX’s launchis now a make-or-break momentfor Palmer and the company.
Ideally, Aston would be able to report strong early orders for the car, then make deliveries without production snags. That wouldlift its share price andenable itto raise cash by selling a smaller stake in itself than would be necessary at itscurrent battered valuation.
But waiting for this best-case scenario leaves Palmer hostage to fortune. At 158,000 pounds, the DBX is ambitiously priced aroundthe middle of Aston’s range, whereas rivals such as Porsche, Bentley and Lamborghini have offeredluxury SUVs at the lower end of theirs. Brexit may alsocomplicate matters:Aston still needs to ramp up preparations for a disruptive departure from Europe, andanybenefit fromincreasedpolitical clarity will likely be dampened by an associated rise in sterling.
A weak reception for the DBX could impedeAston’s ability to raise equity and toservice itspainfuldebt burden. A prudent management team would therefore raise equity sooner rather than later in 2020, giving existing shareholders right of first refusal on the new stock. Encouragingly, the company recently confirmedit was in talks with potential new investors, following reports that motor-racing mogul Lawrence Stroll was interested in taking a big stake.
Palmer has now been forced to gamble everything on one very expensive car, and it should quickly becomeclear if hiswager will pay off. The company could do with equity now. And the current balance of risk and reward may be such that new investors will bewilling to provide it. Given that situation may not last, Palmer should grab it.
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