The goals set by management for motor services provider AA (AA.) at the time of its flotation last year included a revitalised brand, newer technology, and reduced debt. But the cost of achieving these goals, combined with difficult trading conditions in core areas, conspired to massacre the group's bottom line at the half-year stage.
Trading cash profits in its flagship roadside assistance business fell by 3 per cent to £172m. Although revenue was higher and customer retention better, the company saw an increase in garaging costs and booked £7.5m of its £10m advertising spend in the period as it returned to TV screens. This is on top of a three-year, £128m programme to modernise IT and go mobile.
Insurance and financial services suffered by comparison to the prior period, when the run-off of an old line of credit card business boosted profits. The company did manage to increase its divisional cash profit margin from 57.5 per cent to 57.9 per cent, though, by making operational savings in call centres. A financial services partnership with Bank of Ireland, launched in July, is also bringing a range of retail financial products to UK consumers.
Driving services revenue also fell due to lower levels of police referrals and the improved economic environment making it harder to employ driving instructors, while AA's Irish business was restrained by the weakness of the euro against the pound. Finance costs were also up from £138m to £202m as the company took early repayment charges to pay off higher-interest debt, though that should reduce the cash cost of servicing loans by more than £45m a year.
Executive chairman Bob Mackenzie admits his "rant" - as he puts it - about the imposition of a higher insurance premium tax on the embattled motorist has been taken to heart by the market, which is concerned by the churn it may cause in the AA’s customer base. The shares fell 12 per cent on results day.
Analysts at Liberum have reduced their EPS forecast for the year to January 2016 by 1 per cent to 20.9p, and their FY 2017 forecast by 15 per cent to 23.7p.
| AA (AA.) | ||||
|---|---|---|---|---|
| ORD PRICE: | 304.7p | MARKET VALUE: | £1.85bn | |
| TOUCH: | 304.4-304.8p | 12-MONTH HIGH: | 435p | LOW: 285p |
| DIVIDEND YIELD: | 1.1% | PE RATIO: | na | |
| NET ASSET VALUE: | * | NET DEBT: | £2.8bn | |
| Half-year to 31 Jul | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2014 | 492 | 10.2 | 5.7 | nil |
| 2015 | 485 | -63.6 | -8.8 | 3.5 |
| % change | -1 | - | - | - |
Ex-div: 1 Oct Payment: 23 Oct *Negative shareholder funds | ||||
