Will a rights issue have a lingering effect on Aston Martin’s share price?

The recent announcement of a rights issue caused Aston Martin’s share price to take a nosedive, though shareholders had been expecting the news. The issue comes as part of fundraising effort which is, fortunately, multi-pronged.

Luxury carmaker Aston Martin [AML.L] is raising £575.8m in a discounted rights issue as it bids to tackle its debt pile. The group has offered existing investors four new shares priced at 103p for every existing share held. The discounted price is a 78.5% discount on the stock’s last close before the announcement on 5 September.

The announcement catalysed a share price decline of 68.7% from its close price the previous trading day, and the stock remains far from recovery. The Aston Martin share has cratered in response to the raise, down 62.5% in the past month to 183.65p at the close on 20 September. Since the turn of 2022, the stock has plummeted 86.4% and over the past 52 weeks it is down by 90%.

Fortunately, the rights issue is not the only prong of the carmaker’s fundraising effort. Among several funds that have committed to invest, the Public Investment Fund has promised £78m as part of an equity placing. The PIF, Saudi Arabia’s sovereign wealth fund, will be the second largest investor in Aston Martin, a rank that gives it two seats on the board of the company.

Equity raise set to reduce debt pile

The rights issue hasn’t exactly come out of the blue. It’s part of an equity raise of £653m announced in its half-year results in late July. Half of the money is slated towards repaying debt with the rest of the proceeds being used to support future capital expenditure. Once debt has been paid, the group expects net cash between £500m and £600m – the cash balance at the end of June was £156m.

The group had a H1 free cash flow outflow of £234m compared with a £44m outflow in the first half of 2021. The increase was put down to investment on developing new models, including the heavily-updated next generation of sports cars due to launch next year. Net debt was £1.26bn compared with a debt of £791.5m in H1 2021.

Following the half-year earnings report, markets reacted positively. The Aston Martin share price took a 15.3% leap the following day and remained elevated for over two weeks.

Looking forward, Aston Martin is pinning its hopes on the equity raise to turn its fortunes around, though it does have products on deck that may raise its profile and its revenue. Of the equity raise with PIF, the group executive chairman Lawrence Stroll said, “This will transform our balance sheet, significantly improve our liquidity and cash flow profile, provide greater clarity on our pathway to become sustainably free cash flow positive from 2024, as well as creating significant shareholder value.”

The cash not used to pare down debt will allow CEO Amedeo Felisa, who came on board in May, to set her sights on increasing profitability and improving the company’s product offering, including electric vehicles (EV). The carmaker’s first-ever EV offering is scheduled to arrive on the market in 2025, and adds much-needed weight to the company’s medium-term target of £2bn revenue and £500m adjusted EBITDA by 2024 or 2025. 

Analysts rate stock a ‘hold’

Despite the optimism, even if Aston Martin does achieve its targets, AJ Bell investment director Russ Mould believes the group has been “behaving like a desperate start-up company”, suggesting that its fundraising attempts are not strategic beyond the short-term.

Mould also described Aston Martin as “a flop” and questioned whether it would be better off if it were taken private. It rejected a takeover attempt by its former owner Geely [0175.HK] earlier this year that valued the luxury carmaker at £1.3bn. Its market cap had fallen to £248.3m at the close on 20 September.

According to the company, it is navigating challenges due to outstanding global conflicts and struggling to recover from impairment to its logistics caused by Covid-19. Analyst sentiment, however, fluctuates across the board. Of 12 analysts polled by the Financial Times, three gave a ‘buy’ rating, one predicts the stock will ‘outperform’, five recommended to ‘hold’, two predict it will ‘underperform’ and one advises to ‘sell’.