September 20, 2018 / 10:53 AM / 3 months ago

Breakingviews - Aston Martin IPO makes more sense in middle lane

A 1966 Aston Martin DB6 coupe is displayed during a media preview of the newly launched Grand Basel autoshow in Basel September 4, 2018. REUTERS/Arnd Wiegmann

MILAN (Reuters Breakingviews) - Aston Martin should lose the go-faster stripes. The UK high-end carmaker’s pricing range for its October market debut, released on Thursday, implies a maximum equity price tag of 5.1 billion pounds. While the manufacturer of James Bond cars has a luxury brand, it’s not yet totally suited to the fastest lane.

The company is planning to offer a quarter of its shares at between 17.50 pounds and 22.50 pounds when it starts trading on Oct.3. If current net debt of 887 million pounds is included, that would give the group an enterprise value of between 4.9 billion pounds and 6 billion pounds.

The top of that range looks a little stretched. Assuming earnings before tax, interest and depreciation of 355 million pounds next year based on 7,100 units sold at 200,000 pounds each and a margin of 25 percent, Aston Martin’s forward multiple would near 17 times that EBITDA, a Breakingviews calculation shows. The average for the luxury goods sector is under 16 times and Ferrari trades at 20.1 times, according to Thomson Reuters I/B/E/S.

The catch is that Aston Martin’s Italian rival has just raised the bar by promising in its business plan earlier this week EBITDA margins of above 38 percent in just five years. That looks hard for the British carmaker to match. Aston Martin’s margins stood at 23 percent in the first six months of the year. The company is promising to go above 30 percent “in the medium term”, but has not put a firm date on that pledge.

At the middle of the range, Aston Martin would have an equity value of 4.5 billion pounds. That would better fit in with the average for the luxury sector, while still offering investors something to look forward to in view of the company’s promise of a better margin. And with Aston Martin’s production sites all in the United Kingdom, a discount against Brexit uncertainties is called for. All of which underscore the need for a slightly lower gear.

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