Market Analysis: Aston Martin, BAE, Oatly, Boohoo and AirbusAston Martin: margins under pressure; loss of independence down the road? Boohoo looks like the bubble has burst; Oatly - considerable room for gross margin improvement - but at what cost? Airbus- in the spotlight and also BAE
Following Aston Martin's results, Harry Barnick, Senior Analyst at Third Bridge comments:
"Aston Martin's Q1 2022 wholesale volumes declined 14% given the challenges around covid, the war in Ukraine and the semiconductor shortage. "
"Aston Martin is falling behind Ferrari and Lamborgini as their key models age in a premium sector where fresh design is especially valued. The DBX has aged and our experts suggest the 707 lacks the necessary upgrades to improve volumes. The core DB11 model is also in need of replacement.
"With inflation soaring, margins are under significant pressure for the full year. Aston Martin could struggle to pass on these costs to the consumer due to its ageing line-up.
"The shift to EVs is a material drain on cash, with our experts suggesting almost £200M is needed to update one model.
Aston Martin's debt pile continues to loom over the company's performance given the growth headwinds and cost challenges.
"The investment from Mercedes puts it in a strong position to acquire Aston Martin down the road."
Harry Barnick aslo commented on Boohoo:
"Revenue grew 14% vs 2021 but gross margins declined 170bps, reflecting the challenging operating environment"
“Our experts say the Boohoo bubble has burst - with market growth expected to soften and costs rising across the world, both sales and profitability are at risk."
“Boohoo's customers are faced with an unprecedented rise in the cost of living and seem set to cut back on fast fashion spending as a result. “
“Shein's growth has compounded Boohoo's problems, as the Chinese competitor is taking share of wallet from the British fast fashion customer. “
“Freight and container costs remain high and gross margins erosion is an unwelcome byproduct of this challenge."
“ESG factors are front of mind for investors and customers alike. Boohoo's fast fashion model and poor track record of production are a key risk in this context."
Commenting on Oatly, Alex Smith, Senior Analyst at Third Bridge said:
“Our experts say that a price increase in Oatly products is inevitable due to inflationary cost pressures in raw materials, packaging, labour, and energy costs. However, Oatly is considered to be a premium brand in the oat milk industry, so they should be able to pass on additional costs to customers without disproportionate damage to their market share.”
“The ability to ramp up production capacity in the US and China is the key to Oatly’s future success. With the strict restrictions on China’s Covid lockdowns, any delay in the new production capacity in China would risk their supply to retailers and could lose shelf space to competitors. Our experts estimated the capacity should be 1bn and 1.4bn litres respectively by year-end 2023 and 2024.”
“Our experts say that if Oatly can shift the manufacturing models from co-packing to the end-to-end self-manufacturing model, their gross margin can improve significantly. However, the transformation may harm their most urgent plan to ramp up production shortly.”
“If capacity can ramp quickly, Oatly could become EBITDA profitable by late ’23 or early ’24.”
Allegra Dawes, Senior Analyst at Third Bridge picks ups on Airbus:
“Following Boeing’s disappointing earnings results for Q1 2022, all eyes are now on how Airbus is faring in the recovering commercial aerospace market.”
“Airbus reported solid first quarter results, seeing a 15% increase in revenues to EUR 12bn and earnings per share of EUR 1.55, compared to EUR0.46 in Q1 of 2021. Perhaps most significantly, the company continues to confirm its ambitious production ramp up of the A320 family of jets.”
“As the commercial market continues to recover traffic levels, Airbus is targeting 720 commercial aircraft deliveries in 2022. The company is off to a solid start in reaching this goal, reporting 142 commercial aircraft deliveries in Q1, again led by the A320 family. While Boeing has struggled through the recertification of the 737 MAX, Airbus has consolidated its lead in the narrow body segment. Third Bridge experts argue the MAX is facing new order headwinds as it lags the capability of the A320.”
“Demand for air freight capacity has remained strong throughout the pandemic and subsequent recovery period. While Airbus has consistently lagged behind Boeing in the freighter market, the company’s new A350F is a strong offering that will enable Airbus to compete more effectively for new orders, according to Third Bridge experts.”
“In today’s inflationary environment with supply and logistics challenges impacting all industries, a significant concern for Airbus is the dependability of their supply chain. The company previously stated that it would raise production of its A320 family of narrow body jets to 65 per month by summer 2023, then increase again to 75 per month by 2025. Third Bridge experts have raised doubts over the feasibility of these ramp up plans, indicating that there is weakness in critical supply chain segments that could result in a slower increase.“
“The fallout from Russia’s invasion of Ukraine will have significant impacts on the aerospace supply chain. In particular, titanium sourced from Russia has long been a critical element in the aerospace supply chain. Russian titanium accounted for more than 50% of Airbus’ supply and while the company is looking to diversify away from Russian suppliers, they will likely see increased costs and logistic challenges as a result.“
“On a longer time frame, Third Bridge experts expect high oil and jet fuel prices to reinvigorate the effort to decarbonise aviation. The efficiency of new aircraft will increasingly be a commercial differentiator and emerging technologies in hydrogen and hybrid engines are bound to be an area of future growth and competition.”
Finally in this week's round up Allegra Dawes, closes with news on BAE:
“BAE reconfirmed their guidance for 2022 despite supply chain and logistical challenges. The company projects sales growth between 2-4% and earnings growth between 4-6% compared to 2021. Defence spending across BAE's key geographies is set to increase in coming years which will provide positive momentum for current and future program development.”
“Perhaps counter-intuitively, the Russia-Ukraine conflict is unlikely to have a dramatic impact on demand for BAE systems. There may be backfill orders in the short term and additional orders for updates in the medium term, but our experts don’t see any major capital investment any time soon.”
“There may be opportunities in capability upgrades to some platforms. Yet, the leverage will likely come from outside the UK, for example, those countries that have been tied heavily into Russia and are facing pressure from the West to reduce that reliance.”
“Looking forward, our experts question BAE’s ‘old-school’ corporate culture and whether it can be sufficiently agile in the rapidly changing defence industry, in particular, in new areas like cybersecurity. They expect to face fierce competition from internet giants like Google and Microsoft. Our experts highlighted the closure of BAE’s R&D facility at the Sowerby Research Centre.”
“Our experts see more countries committing to meet NATO’s defence spending target of 2% of GDP. However, those countries including the UK would like to retain those capabilities within their own borders.”
Third Bridge is a global primary research firm that interviews more than 6,000 internationally recognised industry experts and business leaders a year to compile 360-degree market intelligence for institutional investors. www.thirdbridge.com