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Aston Martin Lagonda - sales rise, production issue hits volumes

Aston Martin's third quarter revenue was up 15% to £362.1m, reflecting an 11% increase in average selling price to ?234,000.

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Aston Martin Lagonda's third quarter revenue was up 15% to £362.1m, reflecting an 11% increase in average selling price to £234,000. The DB12 production ramp up was temporarily affected by production issues, impacting volumes. Full year volumes are now expected to be around 6,700, down from previous guidance of around 7,000.

There was an underlying operating loss of £48.4m, a 13% improvement on the same time last year.

Net debt was broadly flat at £750m as at the end of the period, compared to the start of the year.

Underlying cash profit margins are still expected to reach around 20% for the full year.

The shares fell 16.3% following the announcement.

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Our view

The market's displeased with Aston Martin's recent progress. There are question marks swirling about demand for the latest models and volumes have come under pressure following production issues. This has spooked investors because unfortunately AML doesn't have a blot-free record when it comes to execution, so bumps in the road like this aren't taken well.

Broadly speaking, performance is relatively robust though. That's especially evident in the group's ability to push average prices higher. The kind of people spending £230,000 on a car are on average less susceptible to economic ups and downs too, which means the luxury end of the market is a better place to be.

The group's also focused on selling higher-margin Specials. Customers sign up and pay a deposit for these rare models before they're built, allowing for tighter working capital control. The cars have also become cheaper to make thanks to efficiency improvements.

While we're supportive of Aston Martin's enviable brand and product prowess, there are some things to be aware of.

Something that affects free cash flow is capital expenditure, and this is expected to rise because of the ongoing transition to electrification and rising prices. It's still unclear exactly when inflation is going to come down meaningfully. This isn't enough to derail Aston Martin's plans, but it's one to keep in mind.

Production delays have been especially painful. The bulk of cash only comes in when cars are delivered. So we're keen to see continued progress on this front - it's too soon to say issues have been cured, even if problems are easing.

The revamped strategy is also being pushed forward. The strategy shifts have left Aston Martin in a slicker position and included a complete overhaul of the way it sells cars. The group ran down dealer inventory levels, helping demand outpace supply. This supported stronger pricing and added to the cachet that comes with buying an Aston Martin. These efforts don't come cheap though, and Aston Martin has already come cap-in-hand to investors, so there's pressure for things to work out.

We're also aware that brand positioning could insulate it somewhat from the shift away from petrol, but electric is the direction of travel for automakers. The first hybrid cars are pencilled in for 2024 release, with a full battery Aston expected a year later. It'll take until 2030 for a full range of electric vehicles to be available.

Management's targeting annual revenue of £2bn, with underlying cash profits of £500m by 2024/25.

Near-term, the group faces some challenges if it wants to come good on its promises. The execution of the electrification strategy will be a key driver of long-term success, and recent strategic partnerships show the group's putting the building blocks in place. Further pressure on the valuation is likely to come from the unclear roadmap for volumes and the success of the electric strategy, especially while the group continues to burn cash. There's no dividend on offer to reward investors for their patience.

Environmental, social and governance (ESG) risk

Most of the auto industry falls into the medium-risk category in terms of ESG. Product governance, particularly around safety, and carbon emissions from products and services are key risk drivers. Business ethics, labour relations and direct carbon emissions are also contributors to ESG risk.

According to Sustainalytics, Aston Martin's management of ESG risks is average. ESG issues are overseen by the board and overall disclosure is strong. There's a robust environmental policy in place, with a commitment to net zero for scope 1 and 2 emissions by 2030 and scope 3 emissions by 2039 and has interim targets in place. However, AML doesn't divulge sustainability-linked revenue and environmental impact isn't systematically considered in the design phase. Although some of AML's facilities are externally certified, scope is unclear and its product and safety programme needs improvement.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 1st November 2023