Last week was one of contrasting fortunes for investors in luxury car maker Aston Martin Lagonda (LSE: AML) and roadside assistance firm AA (LSE: AA). The former’s shares plunged 10% late Friday on the Financial Times reporting the company was seeking to raise fresh capital.
Meanwhile, AA, whose shares soared 16% after a trading update on Wednesday, saw a further 7% boost on Friday, as UK domestic stocks surged on the Conservative Party’s landslide election victory.
Is AA now firmly on the road to recovery? And could Aston Martin be poised to accelerate out of its latest slide?
Fundraising on the cards
Late on Friday, Aston Martin issued a statement in response to “recent press speculation.”
It said: “The company confirms that it is reviewing its funding requirements and various funding options. It is also engaged in early stage discussions with potential strategic investors in relation to building longer-term relationships which may or may not involve an equity investment.”
I think an equity fundraising is very much on the cards, because of a toxic combination of Aston Martin’s high debt and challenging trading conditions.
The name’s bond — junk bond
Last month, the company reported a £35m net cash outflow over the nine months to 30 September. This was despite it bringing in $150m from issuing junk bonds on which it will be paying 12% interest.
Net debt at the period end stood at £800m, an eye-watering 5.5 times trailing 12-month EBITDA. And with the balance sheet also showing negative net current assets of £381m, I’d say credit rating agency S&P is on the mark in suggesting the company “has reached the ceiling in terms of the amount of term debt and cash interest burden that it can sustainably service.”
Due to Aston Martin’s fragile balance sheet, and notwithstanding high hopes for sales of its first SUV next year, I see a high risk of a fundraising and significant dilution for existing shareholders. Personally, if I owned the shares, I’d be selling at 557p.
The strong rally in AA’s shares last week — to 52.4p — means they’ve climbed 27% from an all-time low of 41.4p reached less than a fortnight ago. In a trading update on Wednesday, the company said positive operational momentum reported in its first-half results has continued into the second half of the year, and that it expects EBITDA and free cash flow for the full year to be in line with market expectations.
It also said it intends “to use some of the cash generated to buy back and/or tender for outstanding bonds in the market (potentially imminently),” and that subject to market conditions, “it also intends to pursue a range of debt tenders, redemptions and issuances over the coming months.”
The D-word again
Even after the surge in its share price, AA trades at just 3.7 times current-year forecast earnings. Why so cheap? Well, it’s the D-word again. The company had net debt of £2.7bn at the half-year-end, with leverage at 7.8 times trailing 12-month EBITDA.
I’ve long been bearish on AA due to its sky-high level of debt, and while management intends to use some of the cash the business is generating to reduce the outstanding bonds, I’d want to see a serious reduction of the debt pile before shifting from my current stance of avoiding the stock.
G A Chester has no position in any of the shares 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.