Any investor worth their salt knows that a company’s profit is only an opinion, while cash is a fact. A peculiar contractual dispute involving the beleaguered luxury car maker Aston Martin Lagonda Global illustrates this point rather well.
Ahead of its initial public offering last October, the British firm published a prospectus detailing its recent financial track record. The perennially loss-making company had achieved a small £20.8 million (Dh92.2m) pretax profit for the first six months of 2018. Good news.
Yet that result benefited from £20m of unexpected income booked on the sale of intellectual property to a third-party car maker during the period. The unidentified buyer had approached Aston Martin about acquiring tooling and design drawings for the previous generation Vanquish sportscar, as well as ongoing consultancy support.
With contracts inked, Aston Martin said it expected the cash to arrive in £5 m twice-yearly instalments. In hindsight, it wasn’t a good sign that the first of these payments was already overdue at the time the prospectus was published. More than a year after the contract was agreed, Aston Martin has acknowledged that it may never recover the bulk of the money. A disappointing set of results published last month included a one-off £19m provision for doubtful debt.
The identity of the recalcitrant counter-party had always been kept a secret, despite plenty of speculation in the automotive trade press about who would want the old Vanquish designs and to what end. But during a call with analysts, Aston Martin’s management inadvertently spilled the beans. A China-based electric sportscar start-up called Detroit Electric had sought the company’s help in developing a vehicle chassis system but then failed to make the required payments.
Detroit Electric is the brainchild of Albert Lam, a former director at the British car maker Lotus. The headquarters of this aspiring Tesla are in Hong Kong but its website boasts there’s also a “state-of-the-art vehicle development and manufacturing base” in Leamington Spa, England, which is about 25 kilometres from Aston Martin’s HQ. My various attempts to reach the company for comment were unsuccessful. The latest available accounts of Detroit Electric’s UK subsidiary show a loss and net liabilities for the 2017 financial year, while indicating that financial support from group companies remained available.
Aston Martin appears to be the disadvantaged party here but its management credibility has taken another knock. The shares have collapsed by almost 75 per cent since October as it’s dawned on investors that the company might not be as resilient as it made out at the time of the listing.
A slowdown in sales volumes in its wholesale business has put a dent in any aspirations to take on Ferrari and to be valued like a luxury goods company rather than a petrol-fuelled metal-basher. It also makes the decision by management, lead by chief executive Andy Palmer, not to bolster the balance sheet with new money at the time of the listing seem reckless.
The company, which has seen costs rise due to aggressive investment and Brexit provisions, said last month it expects annual wholesale volumes to be between 6,300 to 6,500 vehicles, compared with an earlier forecast of 7,100 to 7,300 vehicles.
It also lowered its forecast for its adjusted earnings before interest, tax, depreciation and amortisation margin and said it would cut capital expenditure to about £300m from £320m to £340m expected earlier.
The car maker generates little cash but has almost £850m of net debt and lease liabilities. Thus £20m is a lot of money to simply go astray. Its flattering accounting – the company capitalises almost all of its development costs, instead of expensing them in its profit statement – can’t paper over these flaws.
Much will depend on the successful launch of the manufacturer’s first 4x4 model, the DBX, next year. The car will be built at a new plant in St Athan in Wales and is crucial to reach a goal of lifting annual production to 14,000 vehicles by 2023. Last year, sales to dealers amounted to 6,441 cars.
As with those research and development costs, Aston Martin was perfectly within its rights to book the income from Detroit Electric when it did. But it took a while to admit the contract was a bust.
Next time a company tells you it’s had an unexpected windfall, be sure to check the money’s in the bank.