Aston Martin’s ugly balance sheet, and WPP has a rubbish fourth quarter

“There is no let up for equities on Thursday as the selling continues and the coronavirus spreads to new countries. In early trading yesterday the S&P 500 had hinted at a recovery as bargain hunters moved in but it closed firmly lower. The FTSE 100 is following Wall Street’s lead and is now well below the 7,000 mark,” says Russ Mould, Investment Director at AJ Bell.

“Germany’s DAX index is taking some particular punishment, falling 2.3%. Interestingly Chinese markets were in positive territory as the number of new cases in mainland China continues to slow.

“Brent crude remained under pressure falling towards $50 per barrel after several negative trading sessions while gold enjoyed renewed gains, up 0.3% to $1,644 per ounce."

Aston Martin

“Full year results from Aston Martin are as ugly as you can get. Sales have gone into reverse and profit has evaporated. Worst of all is the scale of its borrowings. Its net debt position of £876 million is nearly as much as the entire year’s revenue (£997 million).

“While earnings have been disappointing, the real problem with the company is the state of the balance sheet.

“Arguably the scale of its planned £500 million fundraise isn’t large enough. This may be all the company thinks it is capable of raising in the near-term, but there seems a big risk it will have to go cap in hand to shareholders again in the not too distant future.

“New strategic investor and incoming executive chairman Lawrence Stroll may have underestimated the scale of Aston Martin’s financial problems. Let’s hope he has deep pockets.

“Aston Martin is resetting its business plan which includes a large clear out of the current board of directors. Unfortunately before it can start executing on this plan it is already facing a new headwind in the form of the coronavirus.

“The company has experienced some supply chain problems and China was also expected to be a key source of income this year, given how the country was its fastest-growing market in 2019. The fact parts of China are currently in lockdown is having a negative impact on consumer spending and Aston Martin could therefore struggle to meet previous expectations for sales in the country.”

WPP

“After a year of consolidation and modest progress, 2020 was supposed to be the year when CEO Mark Read really started to deliver, joined by newly appointed finance chief John Rogers.

“He is off to a very ropey start after reporting that underlying revenue slumped rather alarmingly in the fourth quarter of last year. The best investors can hope for now is zero growth and maintained margins in 2020. The targets for 2021 have been maintained but the market’s patience appears to have snapped.

“Read will hope he’s afforded more time to turn things around with his plan likely to involve more simplification of a fragmented business, investment in technology and innovation, further cost savings, reductions in debt and potentially selling off more non-core assets in the wake of the sale of a majority stake in the Kantar market research business.

“The fear will be that this is insufficient to keep up with changes in a dynamic market which is increasingly digital. More businesses are bringing online marketing expertise in-house and consultancy firms are also muscling in on the traditional advertising agencies’ turf.

“The uninspired guidance given by WPP also doesn’t factor in the impact of the coronavirus. Advertising firms are often a decent proxy for what is happening in the wider economy as firms spend more on ads when they are feeling confident and less when they aren’t.

“Confidence could be in short supply until there is more certainty about how the outbreak can be contained and the scale of its economic impact.”

These articles are for information purposes only and are not a personal recommendation or advice.


The daily market update is written by Russ Mould, AJ Bell’s Investment Director and his team. The article highlights the movement in the main index, winners and losers on the day and any macro-economic announcements.