Today, luxury car maker Aston Martin fired the starting gun on its much-anticipated plans to list on the London Stock Exchange later this year. The company is targeting a valuation of around £5bn, significantly above the £2bn-£4.4bn initially proposed by the City.
Alongside its IPO announcement, the group also reported its numbers for the first half of 2018. Revenues climbed 14% to £449.9m, while pre-tax profits rose from £20.1m to £20.8m, a record for the enterprise.
However, if you are thinking of buying into the IPO, there are several issues you need to consider first.
For starters, Aston Martin is a serial bankrupt. Throughout its history, the company has declared bankruptcy no less than seven times, which demonstrates just how volatile the luxury car business can be.
Right now, the group is benefiting from a streak of good luck, reporting profits for seven consecutive quarters. After stripping out the cost of preference shares for the first half of this year, pre-tax profits rose to £42m, booking a profit margin of 24%. Still, its rocky financial history is concerning.
Aston Martin’s mixed history leads me to believe that any investors buying into the group’s shares will have to deal with a lot of earnings volatility.
Sales of luxury supercars tend to be linked to economic booms and busts. Right now, the global economy is expanding, but there’s no guarantee for how much longer this tailwind will last.
Like all car producers in the UK, Aston Martin is exposed to Brexit. The company buys many of its components from the EU, and a ‘no deal’ scenario would undoubtedly create issues in its supply chain.
That said, management believes the group is well positioned to navigate Brexit uncertainty because it isn’t constrained by supply, allowing it to “choose which markets to go into.”
Better news still is that Aston Martin is planning a growth spurt over the next five years. The group expects to sell 6,200-6,400 cars in 2018 and up to 9,800 in 2020 when its new plant in Wales comes on stream. This is a considerable increase on the 2,299 cars sold throughout the first half of 2018.
If the business can hit these targets while maintaining its current profit margins, it looks as if profits are set to surge over the next five years. Funds raised from the IPO will help the company ramp up investment in production.
There are some concerns that by more than doubling production, Aston Martin will dilute its brand. The group is hoping to avoid this by expanding into Asia and reducing its reliance on mature markets such as the UK. Management is hoping to increase the percentage of cars sold in Asia to around 25%, from 16% currently.
Considering all of the above, I’m cautiously optimistic about the outlook for Aston Martin. Demand for the luxury brand is only growing and, as it expands overseas, profits and revenues should continue to grow.
I reckon it could be worth trying to grab a share in this quintessentially British brand when it hits the market.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.