Investing.com -- HSBC downgraded Aston Martin Lagonda Global Holdings PLC (LON:AML) stock to a Hold rating from Buy on Thursday and reduced the price target to 118 pence from 180 pence.
The luxury carmaker’s shares fell 1.2% in London. The stock lost nearly 30% across the past five trading sessions.
HSBC’s move comes amid growing concerns over Aston Martin’s forced transition to a smoother production rate and execution issues that have led to a high level of rework on nearly complete vehicles.
The investment bank’s analysts highlight Aston Martin's struggles with supply issues, which have been a recurring problem for the company.
They noted that achieving the new guidance for the second half of 2024 would require Aston Martin to sell nearly twice the number of cars it did in the first half of the year.
“Given Q3 should be below current market expectations, it still seems Q4 needs to be a record for volumes,” analysts said in a note. “We welcome a transition to a relatively smoother volume run-rate, but it does have implications for cash flow.”
HSBC also voiced concerns over Aston Martin's weak free cash flow (FCF), signaling risks about the strength of the company's balance sheet.
Aston Martin concluded the first half of 2024 with available liquidity of £247 million and has since raised an additional £135 million of debt. However, HSBC's projections indicate that liquidity could drop close to or below £200 million by the first half of 2025, with net debt to EBITDA expected to remain above 4x, potentially limiting funding options.
In its investment case, HSBC acknowledges the potential success of the brand's refreshed lineup, but the firm anticipates earnings volatility and continued cash burn in the meantime.
“We think a stretched balance sheet somewhat compromises the group’s strategy – longer lead times and a fuller order book would be good for exclusivity and pricing, but less helpful for cashflow,” the note states.
While new products and leadership under CEO Adrian Hallmark, along with the prospect of positive cash generation, could attract market interest, the broader context of profit warnings in the auto industry and Aston Martin's specific challenges are likely to lead to investor caution, analysts noted.
HSBC's new target price of 118p represents a modest 7% upside from the current share price. Analysts said that the risks of Aston Martin missing its 2025 targets, including FCF development, justify the downgrade and adjusted price target.